Buying a Car vs. Leasing One: What’s the better way to go?
A car is an essential investment in the modern age. How you obtain a car is a huge decision to make. After all, you’re essentially locking yourself into monthly payments and car-related expenses for the next several years.
Traditionally, the best way to get a car is to buy one. However, leasing has risen to popularity. Leased cars nowadays are not limited to luxury vehicles anymore. You can find a slew of vehicles for lease, ranging from sedans, SUVs to other car types in between.
Now that you have two options, you go through an internal debate: should you lease or buy?
Would you like to drive a new car every few years and enjoy a lower monthly payment but won’t end up owning the vehicle down the road? Or, are you willing to commit yourself to a larger monthly payment and build equity over the car down the road?
Leasing has many restrictions, but it does give you some financial leeway into your monthly budget. Buying a car, on the other hand, gives you more freedom and flexibility, but you do have to pay more for it every month.
Certainly, there’s no right answer to this question. You should decide based on your personal preferences and financial circumstances. One option may be better than the other, so it’s ideal to explore how buying vs. leasing a car sits with yours.
Deciding Between Leasing vs. Buying: The Essential Factors to Consider
How much is the monthly cost?
Whether you decide to buy or lease a car, expect that you’ll have to figure in monthly costs into your budget, typically involving insurance and payments.
Leasing a car may be friendlier in terms of monthly costs than financing a new car. You’ll have more room in your budget to spend on something else. However, you’ll keep paying for a vehicle that would never be yours when the lease ends.
On the other hand, you’ll pay more monthly if you decide to buy and finance a car. Over time, you’re building equity, and once the car is paid off, you are free from the monthly expenses and can do anything about your vehicle.
As for the insurance, insuring a leased car be more expensive than a bought one. That is because most leasing companies have standard insurance policies in place, often comprising of collision and comprehensive plans, and perhaps, gap insurance as an add-on. If you buy a car, you are free to choose the most basic (and cheapest) policy.
How much is the overall cost?
In both options, you’ll also have to deal with the overall cost of owning or leasing a vehicle, including down payment, repairs, and maintenance.
Whether you’re buying or leasing, a down payment is most often required. Look into giving 10-20% of the car’s sticker price as a down payment if you’re buying, or aim at a more significant percentage if you have a poor credit score. If you are leasing, you may also want to give a larger down payment to bring down the monthly payments. In both cases, having high to excellent score helps you seal a sweeter deal.
Also, budget for repairs and maintenance accordingly. If you’re prone to wear and tear, dents and dings here and there, these costs could rise significantly. If you’re leasing a brand-new car, repair and maintenance expenses may still be covered by the car’s warranty. On the other hand, once you’ve paid off a purchased car and it has incurred several years and mileage down the road, you can boost your maintenance and upkeep budget to keep the car in mint condition.
How flexible can you get?
Some people like to drive a new car every few years, so the idea of leasing instead of buying appeals more to them. However, you still want to approach leasing with caution because ending the agreement early could mean some hefty fees on your end.
Meanwhile, others are more content about driving the same car until they’re done financing. By then, they would have full control over the ownership of the vehicle and have the option of selling or trading it in for a new car.
Therefore, it depends on your goals and lifestyle. Both leasing and buying gives you a good amount of flexibility but in different aspects.
BUYING vs. LEASING: The Pros and Cons
A lot of things come into play when you’re choosing between buying or leasing a car. Perhaps the most significant consideration is money – one option can make more sense to you in the short-term, but not in the long run, and vice-versa. Also, you need to take into account your driving lifestyle. Would you instead switch vehicles every few years or would you be happy paying for the same car for the next couple of years until it becomes ultimately yours?
To help you properly weigh your options, here are the pros and cons of buying vs. leasing a vehicle:
Pros of buying
1. Eventual car ownership
Sure, you’ll have to pay off the car month after month, year after year, but there’s always an end to it, and the car will become yours after which, your costs are cut down to just a few like maintenance, insurance, and gas. If you’re happy to end the cycle of monthly car payments, then buying is the right option for you.
2. Freedom to customize
Since you’ll eventually own the car, you have more freedom to add accessories and features to it. Customizing a leased car could mean additional expense for you at the end of the agreement. But a bought one? You’ll enjoy the freedom to tweak it anyway you want.
3. You don’t need the best credit score
Although having high credit score put you at an advantage in getting a good deal, you’ll be still likely to get a car loan even with less than perfect credit score.
Cons of buying
1. It is more expensive than leasing
From monthly car payments, maintenance to sales tax, buying is more costly than leasing in the short-term. You’ll want to purchase a car with a high credit score and provide a substantial down payment to bring down your monthly payments.
2. You need to shell out for down payment
In most cases, you’ll need to shell out around 20% of the car’s sticker price as a down payment to be able to make the purchase, whereas other leasing companies may allow you with no down payment at all. In case you needed a new vehicle right away, such as shortly following a car accident, and you don’t have the money for a down payment, then buying becomes a bit challenging.
3. Depreciation value fluctuates
If you’ve decided to purchase a car, you will be responsible for what happens next: continue driving it, sell or trade-in. If you choose the latter two options, the car would have already depreciated. The problem worsens when you decide to sell or trade before you’re done financing the vehicle because by then, you would be “upside-down.” You will then have to pay the remaining balance off the loan.
Pros of leasing
1. Smaller down payment
Leasing makes a lot of sense to people who don’t have a lot of money saved up for a down payment to purchase a new car or those whose cars have small resale value should they decide to trade in. Some leasing companies even advertise a “zero down payment” while others only require you pay you just a few thousand dollars as a down payment. Still, if you’d like to minimize your monthly payment, you’d want to give as much down payment as you can afford.
2. Lesser monthly payment
Leasing allows you to drive a new car at a relatively lower monthly payment than financing a bought a car. That is because your payments go mostly to the depreciation cost of the car for the duration of the lease. If you have some more wiggle room, you may even consider adding a few more wonderful features or choose a higher end model. Still, you don’t want to base your decision solely on how much it would cost you monthly, but it’s nice to know that you can get a nice car without the cost of buying a new one.
3. Maintenance and warranty
You’ll also pay lesser, if at all, for warranty and maintenance should you decide to lease a car. That’s because the duration of the lease is just about the time frame the car’s warranty and maintenance services are under effect. This helps your car expenses become more predictable month after month, and minimize out-of-the-pocket spending.
4. Enjoy the latest technology and features
If you’re hooked with the latest car trends, then leasing is for you. You can always lease newer cars to enjoy the latest technology, whether when it comes to fuel efficiency, safety features, connectivity and so on. You can always swap or upgrade to a newer vehicle at the end of your lease without having to spend for a newly-purchased one.
Cons of leasing
1. You need to mind your mileage
Leased cars often come with mileage restrictions, usually hovering between 9,000 to 15,000 miles each year. The leasing company may not always check and compute your mileage year after year, but they would at the end of the lease term. Any excess on mileage from the one that’s indicated in your contract can result in hefty fees when you turn over the vehicle. On the other hand, if you drive significantly lesser miles, you’re essentially giving the leasing company free money. From the very start, you should try to figure out how many miles you drive each month or year to compute whether the mileage limits are suitable for your driving needs.
2. You aren’t building equity
When you lease, you’re paying for something you can’t own in the end. You will keep paying monthly payments, but the car will never be yours come end of the lease. You aren’t building equity over the car, so you won’t have something to trade or sell to acquire a new vehicle after three years. You may be able to find zero-down payment leased cars yet again, but if the previous ones have exceeded miles and have wears, tears, and dents, then you need to shell out some money in the end. These end-of-lease expenses can quickly snowball into a couple of hundred to thousands of dollars.
3. You need gap insurance
Most leasing companies require customers to pay for gap insurance, the policy that covers the vehicle should it get stolen or totaled. Gap insurance, or guaranteed asset protection, aims to give you coverage for the difference between what you owe in the lease and how much is required to replace the vehicle. Even if the leasing company didn’t explicitly say that you need gap insurance, it is in your best interest to purchase one as a form of financial protection should something happen to the car while it is under contract.
4. You pay for wear
If you aren’t quite a careful driver, leasing a car may require you to cough up more money at the end of the lease. Leasing companies typically need leased vehicles to be returned in its original condition, so any dents, dings, and wear should be addressed before the turnover; otherwise, you’ll have to pay for them. You also need to remove all the customizations you’ve done and show proof that you’ve performed the recommended service as stated on the contract.
How Does Leasing Work?
Leasing a car is similar to renting a house or an apartment. You get to stay in it, but you’ll never own it in the end. But what many people don’t realize about leasing is that they haggle or negotiate the price of the car, monthly payment or even down payment.
To get started, you need to know the type of car you want to lease. Is it an SUV, a sedan, a luxury car? It’s always wise to begin the process with comparison shopping. Some companies may offer to waive the down payment or lower the monthly payments for you, but keep shopping until you find the best deal.
Next, run the math on identical vehicles but from different leasing companies. Those who offer to waive the down payment may impose a higher monthly payment, but if you choose to offer a sizable down payment, you’ll have a significantly lesser monthly payment. Take a look at your budget and figure out which option works for you both in the short and long-term.
It is also very essential to read the fine print of the lease and raise questions if needed. It should detail the finer details of the payments, including all fees and charges. The lease may also state that you can purchase the vehicle at the end of the contract, and if you’re interested with that, it’s best to clarify from the very start.
Also, look for details that may indicate end-of-lease costs such as excessive wear and tear and exceeded mileage. The contract may also indicate that you need to purchase gap insurance, which gives you protection should the leased vehicle is totaled in an accident or gets stolen.
Once you have signed and sealed lease deal, you can now drive the car home. Remember that you’ll become responsible for the car now, and you will be penalized with any damage that you incur. Also, make sure to follow the routine maintenance schedule to prevent additional costs at the end of the lease.
Finally, you have several options at the end of the lease term. You may want to purchase the same vehicle, return the car and walk away, or find a new car to lease. Whichever is the case, make sure to return the car in a satisfactory condition.
How Does Buying Work?
Now, if you think that car ownership is the right route for you, there are two things you need to keep in mind before you go car shopping: the right vehicle and the best financing plan.
Before you wander off the dealership, you should have visited your bank or credit union and get pre-approved for a car loan. With a pre-approval, you have better leverage when negotiating for a car loan; you can have several businesses compete for your business, and you can always say no to in-house financing if you like.
Once you get a pre-approval, you want to do some research first. Find a car make and model you like and try to figure out its current sticker price. You’ll find plenty of resources to compare car costs, such as the Kelley Blue Book and Edmunds.com. Once you know how much the potential car is likely to cost you, shop around in dealerships first. Don’t buy from the first dealership you set foot into.
Now, you want to negotiate as best as you can. Car dealership sales associate will try to sweet talk you into purchasing right then and there, but stick to your guns and let them know that you aren’t swaying. Also, make sure to run the math. While it may be tempting to purchase based on the car’s monthly payments, you want to base your decision based on the vehicle’s total price.
Finally, take the car for a test drive. You want to know for sure if this the vehicle that you’d want to drive for the next several years and that you’ll be happy paying for it month after month.
Leasing vs. Buying: Which is Better?
There is no universal answer as to what is better between leasing and buying because driving lifestyle, financial circumstances, and personal preferences vary from one to another.
Leasing has become a popular option because it seems to be cheaper for the short-term. You get to pay lower monthly payments; you don’t have to deal with hefty repair bills, and you’ll always have the latest in car technology. It’s a more appealing option to people who like to drive a new fancy car every few years.
But if you take in the larger picture, buying can make more financial sense for a lot of reasons.
First, you’ll eventually own the car. Those monthly payments will stop after the financing term, and all you have to deal with are insurance costs, maintenance, and gas. At the end of the financing term, you would have full equity over the vehicle, and you can do what you please: drive it to the ground, sell, or trade-in. You get to have more control over what you can do with the car without having to an agreement or contract.
The car is probably the next biggest purchase you make (next to a house), and it’s essential to figure out the best option for you: to lease or buy the car. There’s no standard answer to this question. What may work for you may not work for someone else, and vice-versa.
However, you do want to look at your bigger financial picture and driving lifestyle. If you’re the type of person who’s happy to drive a new car every few years but never own it, then leasing is for you. But, if you treat the car as an asset and investment and you want to build equity over it, then buying is the right choice for you.
At the end of the day, you want to consider every aspect of your decision. This is not a matter that you should take lightly, so be sure to lay down your options and figure out what works best for you.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.