New Car Shopping: Should You Lease or Buy?
Buying a new car is one of life’s exciting experiences and the biggest financial obligation one can have — from down payments, monthly insurance, maintenance fees plus those pricey trips to the gas stations each week.
But let's be honest here: if you are still driving that Volkswagen Beetle or that MINI Cooper when you just had your fourth child it is a big yikes! You've probably outgrown that vehicle with a little chance of fitting three (and certainly not four) car seats into the back of your car.
So is leasing or buying a new car the right choice? Let us know the pros and cons of leasing versus buying in making cost effective decisions.
BUYING A CAR
Buying a vehicle with a conventional car loan is simple: you borrow money from a bank, credit union, or other lending institution and make monthly payments for some number of years. As you repay the principal, you build equity and by the end of the loan the car is all yours.
THE PROS
Buying a new car is a fresh start - you know 100% for certain that this car has never been in an accident or had any mechanical issues. It also has newer features - you can get a wide variety of choices from models, transmissions and more. New cars can also be customized according to your car needs and likings.
Additionally, a new car comes with an untouched factory warranty for a predetermined number of miles. The manufacturer’s warranty will likely be reasonably priced and comprehensive warranty coverage your vehicle could ever have. Also, as auto manufacturers continually have to adjust to more precise safety regulations as technology continues to evolve, the safety of new cars continues to get better.
You can keep the new vehicle as long as you want to and if you want to sell or trade it, you can do that anytime and that’s something you wouldn’t be able to do in a lease agreement.
THE CONS
Loan payments are usually higher than lease payments because you’re paying off the entire purchase price of the vehicle, plus interest and other finance charges. You are also responsible for all repair costs and this will increase over time and may be costly.
In addition, the vehicle will depreciate as it might lose its trade-in or resale value over time. You cannot expect a high return if you decide to sell the car over time.
LEASING A CAR
Leasing a vehicle is less straightforward than taking out a car loan. Monthly payments are usually lower because you’re not paying back any principal. It is like renting a car for the long term - borrowing and repaying the difference between the car’s value when new and the car’s residual.
THE PROS
Monthly payments are affordable - you’ll only be paying for the vehicle’s reduction in value, interest, taxes and fees.When you lease, it gives you freedom to switch up your vehicle every two or three years so you can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
Cars are typically leased for three years, so if you lease a brand-new vehicle it will likely be under warranty for the duration of your lease. But you may still have to pay for maintenance and repairs, and you might even be required to replace worn tires, scratched windows or other blemishes when you return the car.
At the end, you can just drop off the car at the dealer - suitable for anyone who wants short term contracts.
THE CONS
In the end, leasing usually costs you more than an equivalent car loan because you are paying for the car during the time when it most rapidly depreciates. The contract might limit what you like to do with the car. You’ll end up paying extra fees if you drive over the designated mileage limit, which is something you wouldn’t have to worry about if you owned the car.
And if you decide that you don’t like the car or if you can’t afford the payments, you will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they’ll all be due at once. Those charges could equal the amount of the lease for its entire term. In addition, you may have to pay a fee when you turn the vehicle in at the end of the lease.
The Decision Depends on You
Deciding whether you’ll lease or purchase a car depends on your lifestyle. By assessing the pros and cons discussed above, it will eventually become obvious whether leasing or buying is a good or bad decision. No matter what you decide you should either pay cash or make sure that you can afford the car.
Leasing a vehicle often has lower monthly payments depending on the mileage and term you choose, but you won't own the vehicle at the end of the term. While buying a vehicle means you have the benefit of full ownership with no mileage restrictions, however you are responsible for trading or selling your vehicle if you would like or need a different car.
So if you’re torn between the two, you should also do your research and make sure that you start by calculating your hypothetical monthly costs for leasing vs. owning. You may also want to consider how much flexibility will matter to you down the road. Depending on your costs and needs, you’ll be able to decide to lease or buy before you head to the dealership.
