TO LEASE OR TO BUY?
When it comes to car buying, the process of deciding which car best suits your needs, what to do with your current car, and how to finance your new (or “new”) car can be overwhelming. For many people, financing the car can be the most stressful part of the car buying process. Much of this stems from the uncertainty of whether or not to lease or buy. This article will take a closer look at the benefits and drawbacks of leasing and buying a car.
Definition of Leasing
Investopedia defines leasing as “a contract outlining the terms under which one party agrees to rent property owned by another party.”i With a lease, the lessee (renter) pays the lessor (owner) pre-determined, regular payments until the contract ends. With a car lease, there is often an option to buy at the end of the pre-determined term. Lease contracts usually include a pre-determined max amount of annual miles driven. If the lessee drives more than the pre-determined amount, additional fees are usually incurred. Despite some lower fees, when all costs are added up, leasing generally costs more than buying. ii
There are two types of car leases: closed-end and open-end. A closed-end lease means at the end of the lease, you walk away from the car. You may have to pay for any mileage coverage or fees at this time. An open-end lease means you must purchase the car at the end of the lease period. This is generally considered the best option. iii
Definition of Buying
The car is yours-you own it. Usually, “buying” from a dealership includes financing through a third party-such as a bank or credit union– to pay for the vehicle. Down payments are usually required and the more money put down at purchasing will equal lower monthly payments. Despite generally higher monthly payments and up-front costs, buying is usually cheaper than leasing.
Benefits of Leasing
One of the largest benefits to leasing a car is a lower out-of-pocket cost. There is usually little to no down payment, and zero upfront sales tax payments. Since lease terms are usually three to four years, you have the benefit of “owning” a new car every few years. With a lease, you only pay for the depreciation of the car and are not absorbing the full depreciation cost of the car. Because of this, you will never be put in an upside down position.iv You are also responsible for car maintenance, including oil changes, tire rotations, and recommended manufacturer maintenance.
Leasing is also a good option when, for whatever reason, buying a car isn’t an option. Banks will usually only finance $30,000 for a car loan. If you require more financing than that, a lease can be the way to go. Leases offer a predictable ownership cost and peace of mind: you are not responsible for reselling the vehicle. At the end of your lease, you simply turn the car into the dealership.
Drawbacks of Leasing
Generally, leasing terms restrict the number of miles you can drive; usually around 9,000-15,000/year. You will also always have a car payment and generally, insurance companies have higher rates for leased vehicles. You are paying for the most expensive years of the cars life as the amount of the lease is the difference between the purchase price and salvage value (predetermined value of the car at end of lease period). With this knowledge, it’s a good idea to lease vehicles that retain their value well.v Since the dealership will want the car returned in sellable condition, you will not be able to modify or customize your vehicle.
Benefits of Buying
If you plan or like to keep your car for several years, buying is a great option. Whether you pay for the car in full at time of purchase or over time through a financing option, once you have completely paid for the car, it is yours. Insurance rates tend to be lower when buying a car and you don’t have to worry about economic limits for mileage. If you finance your purchase, you gain equity in the car provided your payments outpace vehicle deprecation. vi
Drawbacks of Buying
When you decide to sell your car, you are subject to market value fluctuations as you don’t know the predicted future value the way you do with a lease. With lease, if the car is worth less than the predicted future value; it’s not your concern in the same way it is if you purchase the vehicle. Another concern is the amount of down payment required when purchasing as many lenders require a 10-20% down payment. To help combat this, many people are enticed to extend the length of their car loan; allowing interest more time to compound with higher rates meaning you will end up paying more for the car. Finally, if the car depreciates faster than the payments you make on it, you may owe more than the car is worth-meaning you are in an “upside down situation.” vii
In the end, whether you lease or purchase a car is your decision. Each decision is different based on personal situations. Consumers should consider each pro, con, and overall costs to determine which is the best fit.