Buying vs. Leasing a Car: What You Should Know
Getting ready for a new vehicle this holiday season? While it'll be an exciting time to get behind the wheel of a new car, deciding how you'll purchase it can be a complex process. Consider these pros and cons of buying vs. leasing a car.
Weighing the Pros and Cons of Buying vs. Leasing a Car
Choosing whether to get an auto loan, a lease, or to pay cash for a vehicle can be overwhelming and confusing. Your future plans also come into play; making a car payment every month could become burdensome should your financial life take a turn for the worse.
Buying a Car
When you buy a vehicle, you either pay the full price in cash at the time of purchase, or, you get a loan from a private party, bank, or the car dealer for the purchase price minus any down payment. You pay the loan back, plus interest, in monthly installments over a specified term, usually of 3 to 8 years.
If you get a loan, you are often required to make a cash down payment for approximately 10% of the vehicle price. The lender then holds the vehicle title until the loan is paid off. Then you become the owner free and clear.
In some cases, an auto dealer or lender may not require a down payment; however, the more you pay upfront, the lower your debt and payments will be.
For example, if you buy a new car for $30,000 and make a 20% or $6,000 down payment, you make up the difference by financing $24,000, says Laura Adams, Safety and Education Analyst at DriversEd.com.Your monthly payments are determined by the length of the loan and the interest rate. Other considerations include whether you buy a new or used vehicle, the price, your credit, and how much you earn.
Advantages of Buying a Car
When you pay full value for a vehicle, it becomes 100% yours, and you have no monthly payments. Even if you have a loan, buying allows you to:
- Make changes to the vehicle, like adding a stereo or repainting
- Sell the car for cash whenever you want
- Drive unlimited miles
- Refinance if you find a lower interest rate
Getting a loan to buy a car is also easier than qualifying for a lease.
Disadvantages of Buying a Car
- You often pay a higher sales tax than with a lease
- You are solely responsible for maintenance
- Your warranty will expire
- It requires more money up-front
When you lease, you never become the owner of the vehicle. You simply have the right to use the car, with limitations, for a term of time, after which you can renew the lease on the same vehicle or turn it in for a newer model.
During the lease, you pay a monthly amount equal to the estimated depreciation value of the vehicle, plus interest, and sometimes other fees. Leases also have down payments, but they are usually lower than the down payment required for buying.
Unlike with a car loan, you should pay as little down as possible with a lease, since you never build equity in a lease deal, Adams says. In other words, only pay the minimum required amount upfront. Also, it’s best to lease new vehicles only for a term that doesn’t extend beyond the warranty period.
Leasing is a more complex financial transaction than buying and has its own vocabulary. A few essential leasing terms are: Capitalized cost is the purchase price, cap cost reductions are discounts, and residual value is the expected value of the vehicle at the close of the lease.
Advantages of Leasing a Vehicle
- Lower monthly payments, making it possible to drive a higher-priced, newer car
- No maintenance costs. The dealership and auto manufacturer usually cover these costs
- Easy trade-in. As long as your credit is good, trading in your leased car at the close of the lease for a new lease is simple
- Reduced sales tax: In many locations, sales tax is lower for leased vehicles
Disadvantages of Leasing
- Restrictions on mileage
- Cannot make changes to the vehicle
- Extra cost for gap insurance
- Fees at the end of the lease for extra mileage, damage, and other expenses can be costly
- Excellent credit needed to qualify
Ultimately, the deciding factors in buying vs. leasing a car depend on personal preference and credit standing.