Is It Better To Buy Or Lease a Car?

It can be tough to decide between buying and leasing a car. While it’s true that you’ll save money by purchasing a used car and have it in your possession as long as you want, it may not be the best choice when what you want is a new car. So, should you buy or lease a car? Let’s find out the answer!

For those who have ever gone to a dealership to shop for a car, they’ve likely been offered to lease one, and such an opportunity is tempting. You drive home a brand new car for a more affordable monthly payment compared to if you apply for a loan to buy the vehicle. Subsequently, in a couple of years, you’ll be offered to buy your leased car and gain full ownership of it, or you can choose to trade it in for another new car. Sounds great, doesn’t it?

From the viewpoint of someone who wants to get a new car as soon as possible, leasing may sound like a good idea. But try to ask financial writers about it and you’ll get an answer that totally contradicts that idea. They will not recommend leasing since it’s actually not as affordable as it seems. In fact, leasing makes you spend more money in the long run than if you buy the car.

Now as an alternative consideration, this thought might cross your mind: “What if the car is more costly? I don’t need to own it. I just want to drive it, without worrying about ownership or maintenance.” Well, if that’s how you think about it, then leasing may indeed be your thing. All you have to do is pay for the luxury you enjoy, in a more expensive way – if you don’t mind it.

Perhaps, leasing is only recommended for an abundant person who is free of debt and has attained financial success. That person should probably be shrewd enough to understand that by putting their cash into the stock market (instead of using it to buy a car), they may grow good profits in the future.

Theoretically, it’s a brilliant decision to invest the money you would’ve used to buy a car, and turn to leasing instead, provided you’re disciplined and actually invest the money, in addition to willing to keep the money in the stock market for tens of years – that’s if you really can resist using the money for that long, and if you believe that this is rational.

Otherwise, buying a used car is also a good way to pay less if you keep your vehicle over a long period into the future. However, if you insist on leasing while also saving money at the same time, the only way for you is to buy a new car and trade it in as soon as possible toward a new lease.

What should be noted here is that it’s never a smart money move to purchase a new car, but if you like to have a new car every year, leasing is the solution for you. If you desire a new car every once in a while and want to lessen economic fallout, you should drive it for at least a decade.

Let’s check out other advantages and disadvantages of car leasing:

The pros of leasing

New vehicle

When you turn to leasing, you’re choosing luxury and convenience. It’s luxurious to always have a new car and convenient not to worry about its maintenance. Of course, you’ll still need to change its oil every three months, but since the vehicle is new, it’s hoped that you won’t have to worry over any serious repairs (should they happen) as warranty would cover them.

Cheaper monthly payment

Most of the time, monthly lease payments are lower than if you apply for a loan to buy the vehicle at regular interest rates over three or four years. You should remember, though, that a down payment may be required to lease, with its amount equal to that required if you buy.

You don’t really have to commit

If you plan to keep your car only for a certain period of time like two or three years (for example), then leasing does make sense for you. Or maybe you just want to have a new car for now, but in the coming years you’ll need a larger vehicle for your growing family, so you’ll need a replacement again. Leasing allows you to get your temporary car.

Deductible business expense

Leases can be an enticing mobility solution for business owners as they can deduct some of their lease costs based on how much the car is driven for business purposes.

The cons of Leasing

You’re not the owner of your car

Leasing does give you a new car but it doesn’t make you its owner. In addition, it always requires you to pay monthly for the car you drive, which can actually be costly in the long run. On the contrary, if you buy a car and become its owner, you have full rights to sell it in the future. It’s true that your car will depreciate over time, but it still yours, and it’ll retain some of its value which makes it remain sellable.

There are mileage limits

If you are someone who doesn’t want to be limited, especially in driving, then a lease is not for you. Yes, it doesn’t allow you to drive a lot, because dealers want you to return the car with as low miles as possible on the clock, so that they can resell it as a two- or three-year-old certified used car.

That’s another way dealers make money in addition to collecting your monthly lease payments. So the more you drive the car, the lower price it will fetch when resold. This decrease in value is anticipated by charging you around 12 cents for every mile you drive, and there’s also an annual mileage limitation of between 12,000 to 15,000 miles.

Excellent credit is required

Unlike an auto loan, a lease requires you to have excellent credit. If your credit score is low, just forget leasing, since you don’t qualify for it.

No customization

When using a leased car, you’ll want to be careful so as to avoid any excessive wear-and-tear on it, which would make you pay (unwanted) extra charges. In other words, there should not be dents, dings or interior damage. If these are not allowed, then know that customization is absolutely out of the question.

It’s difficult to exit a lease

If you purchase a car and several months later you face a job loss or want to switch to a different vehicle, you can always put it up for sale. With a lease, you won’t get out so easily. A lease is not something you can just end as you wish, not so early without hurting your credit.

Negotiating a lease is very tricky

The way leases are priced is so difficult to understand, the process of leasing itself is much more complicated than that of buying. Sometimes even if you work at a dealer and offer leasing yourself, you would actually not understand what you’re selling.

Lease prices partly depend on the following factors:

  • Cap cost: Comparable to the original price of the car.
  • Term: The duration of the lease.
  • Mileage limits: How many miles are allowed in a year.
  • Your credit score.
  • Money factor: It’s basically the interest rate you’ll pay during your lease, so the lower, the better. The money factor is expressed as a very small number such as .00285. You need to multiply it by 2,400 to get the number you can comprehend as an interest rate. In this example, the interest rate is 6.84%.
  • Residual value: It’s the value of the car at the end of the lease. A higher residual value means a lower monthly payment, but also a more binding lease (which is harder to exit). Meanwhile, a lower residual value results in higher monthly payments, but the buy-out option is more affordable at the end. A lower residual could also make the lease easier to sell or trade in mid-term.

Is It Better To Buy Or Lease a Car?

If you’re not sure what you’ll be doing, it’s always better to buy your next car instead of leasing it.

A used car is the most financial-friendly solution if you don’t need to have a new car. But if you do, you can consider leasing. Just make sure you won’t keep your car for more than five years.

The following situations could also make leasing a sensible choice:

  • If you’re successful, have no debt and only love to drive a new car without having to worry about its maintenance. Also, you have a lot of money and are willing to pay for the luxury. If you meet these criteria, then you’ve got what it takes to lease a car. Still, the most important thing here is that you know what you’re doing (leasing) and are happy with it.
  • If you want to invest the money that you would otherwise use to purchase the car.
  • If your car is used for business purposes and you want to deduct expenses for business driving, leasing may come with a larger tax break (consult this with your tax advisor).

In the end, you should keep in mind that there are always exceptions. For instance, you plan to keep your car for only a couple of years and just want to ditch it when you’re done. And in certain circumstances, popular used cars might see their values soar when the lease is over, making lessees winners (although this possibility should not be counted on).

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