It’s not as straightforward as you think.
I’m ready for a new car, but I’m not sure whether I should buy or lease. Leasing seems way less expensive and more beneficial — i.e., not having to worry about paying for costly repairs as the car ages. Plus, who wouldn’t want to trade in their car for a newer model every three years? But are there downsides to leasing? Should I also consider buying a vehicle?
There are so many things to consider when buying a new car: leather or cloth? Hybrid or flex fuel? Can I really live without a sunroof? What monthly payment can I afford? But one of the most important decisions to make is whether to lease or buy. And it’s not as straightforward as going with the option with lower payments.
Love the New Car Feel? Consider Leasing
Do you drive less than 15,000 miles per year? Do you like a new car every few years? Does your car look like new even after it’s three or four years old? Do you have a limited monthly payment budget? If so, then leasing might be your best bet. Here’s why.
First and foremost, in terms of the monthly payment, leasing a car is generally cheaper than buying one.
While you are limited in terms of mileage, most car leases allow between 12,000 and 15,000 miles per year, and the average driver in the U.S. drives 13,474 miles annually.
That being said, if you go over your mileage on a leased car, you’ll get hit with penalties — as high as $0.25 per mile. Let’s say you went over your allotted miles by 10,000 miles. When your lease is up, you’d owe an additional $2,500. Yikes. Worth noting: You could spring for a high-mileage lease. But your payments will increase significantly, and you must decide on this option at the beginning of the lease.
One big upside to leasing is that when the term is up, you can bring your car back to the dealer and get a new car without having to deal with trade-in values or owing more than your car is worth. That’s a big plus, but only if you’re comfortable holding on to the car for two to four years. Remember: terminating your lease early can cost as much as finishing out the lease term.
Another leasing downside: If you decide at the end of your lease term that you want to keep the vehicle, you could pay more than fair market value. Here’s why: When you sign a lease, you agree to pay the difference between what the car is worth that day and what the car will be worth when your lease is over, also called the car’s residual value.
When you sign your lease, many dealerships inflate the car’s residual value so they can give you a lower payment. Used car prices are also down, so once your car comes off its lease, its market value has probably taken a hit. Now you’re looking at a gap between what the dealer thinks your car is worth (its residual value) and what its market value is, which means that if you purchase your car coming off the lease, you could pay more than what it’s actually worth.
That being said, it can work the other way around, too, if the car holds its value better than expected — i.e. if a car is extremely popular throughout the term of your lease.
When navigating a lease, you also have to be careful about excess wear and tear on the vehicle. You can be penalized at the end of the lease for issues like dents or scratches on the exterior, rips or stains in the interior, or mechanical issues. As such, leasing can be tricky for parents of small children or those with pets.
One more downside to leasing: As opposed to buying, you don’t actually own the asset — your car — at the end of the lease term.
How to Save Money When Buying
Do you drive way more than 15,000 miles every year? Do you like to keep your vehicles for a decade? Do you have kids or pets who aren’t exactly gentle on your interior? Can you afford a higher monthly payment or a much longer payment term? If yes, then purchasing might be a better choice.
When you buy your vehicle, there are no restrictions on the number of miles you put on it, though excess mileage can affect resale value. If you have a long commute, take a lot of road trips, or otherwise rack up tons of miles, then buying is probably a better option.
You also don’t have to worry about wear and tear on your vehicle (except, again, in terms of resale value). You won’t get charged for a big scratch or torn upholstery. And if your kids manage to grind rainbow sprinkles into your carpet or your dog’s fur gets permanently woven into your upholstery, no big deal! (Just take lots of deep breaths.)
Another plus? When you buy a car, once you’ve paid it off, it’s an asset that you can sell. (Worth noting: It’s an asset that depreciates.)
Of course, downsides to buying exist. To get payments similar to lease payments, you’ll need to finance for a lot longer (five to seven years). You may still be making payments well after your warranty runs out, meaning you could end up paying for repairs alongside a monthly payment, though an extended warranty can solve this — at a cost.
Another factor is that if you prefer driving a new vehicle, it will likely lose value more quickly than you’re paying it off. Don’t believe me? Experts say that the minute your drive a new car off the lot, it loses 10 percent of its value.
Another major drawback: When you purchase a vehicle, most dealerships require a 10 to 20 percent down payment; when you lease a car, however, the down payment is much smaller — or even zero.
Of course, if you buy a used vehicle in cash, you will avoid these downsides. Though it can be intimidating to purchase a used vehicle, you can take some of the money you’ll save and put it toward your car repair budget. In other words, even after factoring in the cost of additional repairs, you will often still save money over buying new or leasing.
If you do choose to finance your vehicle, it’s important to understand the specifics of the lease or loan you’re considering. Terms can vary widely, and you should determine your likely total cost, rather than just focusing on your monthly payment.
In short, when it comes to car buying, do your research, come prepared, and be realistic when balancing what you want versus what you can afford.
Road trip, anyone?