As a car shopper, you have two choices: lease or buy a car. Which you choose depends on what you’re looking for. Some buyers want the advantage of changing out their car hassle-free after a few years, while others prefer owning their car as an asset.
In this post, we’ll look at the difference between buying and leasing a car and the pros and cons of choosing either option.
I | What's the difference between leasing and buying a car?
There is a significant difference between leasing and buying a car.
Leasing a car is like signing a rental agreement. Applying the same principle, when you sign a lease agreement, you agree to pay for the use of the vehicle for a specific period.
Once the lease expires, you must return the vehicle to the dealer.
Your lease payments don’t afford you a title for the vehicle, and neither does it build equity. Upon returning the car, you’ll start the leasing process all over again, or you may opt to purchase a vehicle instead. Some lease companies offer the option of purchasing the car you leased at the end of the contract.
Your monthly payments go toward eventual vehicle ownership when you buy a car. Unlike a leased car, you have to consider the car’s depreciating value.
New vehicles depreciate the moment they leave the dealership lot. Most warranty periods offer you protection for three to four years or based on your mileage limit. The limits typically run from 36,000 to 60,000 miles. After the warranty passes, all further costs will fall on you for repairs and maintenance.
Leasing versus financing or buying a car comes down to equity and ownership and whether it’s a wise financial decision for your plans in the future.
II | The Pros and Cons of Buying a Car
The Pros of Buying a Car
1. Equity and Collateral
Car ownership can give you an advantage in securing a loan. By using your vehicle as collateral, you can increase your chances of approval. The more risks you assume on your end, the higher the chances of lenders offering lower interest rates.
2. Tweaks and customizations
As the vehicle owner, you have the flexibility of customizing it however you’d like. Whether you want to remodel the interior with a new steering wheel, install a new radio, or tune the engine.
With a leased vehicle, permanent modifications are out of the question.
3. You can sell your car
If you want another car, you can sell the old one and make up the funds for the new one you’re buying. If you’re still paying off a loan, the added step is squaring off the loan before you sell or trade it in with a dealer.
4. Payment free… eventually
After you pay off your auto loan, you’ll be car payment-free. You know when it will end. Once it does, the monthly loan payments are yours to keep and use for something else.
5. Lower insurance premium
Insuring a car you purchased is cheaper than insuring a lease. When you lease, the vehicle doesn’t belong to you, and the leasing company will want to take every precaution to ensure it can recover its investment in the event of a crash.
6. No mileage limits
You won’t have to worry about excessive mileage when you buy your car. If you’re planning a cross-country road trip, you can do so without the threat of extra fees looming over your head.
7. No penalties for wear-and-tear
You don’t have to worry about a dealer’s definition of “normal wear and tear” when you own the vehicle. If you ding your car, it’ll be cheaper to repair than footing the bill a dealer gives you at the end of your lease contract.
The Cons of Buying a Car
1. Demand and prices
Dealers hike the prices of the latest and most popular models based on demand. These dealer markups also apply to redesigned models. When leasing, there’s a chance you can afford a car priced out of your buying range.
2. More money upfront
Buying a car requires a higher upfront payment as you repay your loan. The higher your down payment, the lower the loan and, therefore, your monthly payments.
3. Higher monthly payments
Your auto loan payments will be higher than monthly lease payments.
4. Higher maintenance costs
Long-term maintenance costs add up. After the warranty expires, you’re left to sort out costly repairs if your insurance does not cover them.
5. Rapid depreciation
Your new car loses value as soon as you drive it out of the dealership. Sometimes a vehicle loses value faster than you can pay off the loan, leaving you with little equity or residual value. The residual value is the vehicle’s worth when you trade in or sell it.
III | The Pros and Cons of Leasing a Car
The Pros of Leasing a Car
1. Lower monthly payments
Leasing a vehicle is cheaper than the monthly costs of a loan.
Leasing can ease the short-term financial burden if money is a concern and you require a car.
2. Driving the latest models
Because of the considerably lower costs of monthly lease payments, you can opt for a car priced out of your regular loan range.
3. Lower upfront costs than traditional financing
Not all leases require an upfront payment. If you’re on a tight budget, no payment down keeps your spending in check. And even if there is a deposit, it’ll be lower than buying the car.
4. The benefit of warranty protection for the lease period
Most warranties span three years or up to 36,000 miles, which is the typical length and limit of a lease. Factory warranty protection means lower maintenance fees and a lower chance of unexpected repairs biting into your budget.
5. New car every few years
If you love the new car smell and often get bored driving the same one for too long, leasing might be for you. Once the term is up, you can return your current car, replacing it with a newer model. You won’t have to worry about settling a loan and the hassle of trading in for a new drive.
6. Maximizing tax deductions
There is no upfront sales tax, and if you lease the vehicle for business, there are tax advantages. A lease can grant you higher tax write-offs than a loan. The IRS will deduct the depreciation and financing costs calculated into your monthly payment.
The Cons of Leasing a Car
1. You won’t fully be in control
This lack of control comes as mileage restrictions and a lack of ownership rights. You can’t drive as you please, going on spontaneous cross-country trips without first consulting your lease agreement.
There is a cap, and you’ll face an excess mileage penalty once you pass it. Monitoring your driving habits is key when looking to avoid extra charges.
Extensive modifications are also out of the question with an auto lease.
Early termination fees, excess wear-and-tear charges, and a range of others may also apply. Make sure you understand the terms outlined in the arrangement. Once the lease term is up, the car returns to the dealer.
2. Additional insurance coverage
Insuring a leased car is more expensive because of the dealer’s risks. You’ll need comprehensive, collision, and gap auto insurance. It’s not far from a full coverage policy combining comprehensive, collision, and liability insurance when financing, but the rates are higher.
3. Lack of investment opportunities
For many, the investment opportunity is a central factor. When you lease a car, the benefit of having it only lasts for the duration of the lease. There is no real return on the money you spend, and you can’t use the car as collateral for any financial transactions as it’s not yours.
IV | Last Considerations Before Leasing a Car
There are some questions you need to ask yourself before leasing.
- What is your typical annual mileage?
- Will you use the vehicle for business or personal use?
- How long do you plan on leasing the vehicle?
- What is your monthly budget?
- Can you afford the higher insurance premium?
- How will your lifestyle affect the car’s condition? Do you have kids or pets? Will a teen or inexperienced driver be driving?
- Do the advantages of a lease deal outweigh the disadvantages?
Negotiate the terms of your lease, factoring in the above considerations and others specific to your lifestyle. Ask questions and make sure you clearly understand the restrictions, charges, and applicable fees.
Conclusion
Deciding on leasing or buying a car depends on thoroughly evaluating your finances. Buying a car grants you equity, which you can use as collateral for a loan. Leasing offers you none of these.
Consider the payments required and how to handle them in the short and long term. And if a lease restricts your freedoms too much. Annual mileage restrictions apply, and the extra charges for the additional mileage may be expensive.
