Are you thinking about leasing or buying your next vehicle? There are both sides to the coin.
Maybe your friends and family are happy with the new car they just leased, and you think it might also be a good option for you.
In this article, I will cover what you need to look at then you determine what is better for your situation. While items like lease terms, acquisition fees, and lease period are important, the determining factor starts with your credit score.
If you have bad credit, leasing might be a better option since less money is laid out initially, and monthly payments are typically lower.
Later on, we will compare both financing and leasing.
We will answer the questions about dealer financing and available lease options.
Is it better to buy or lease a vehicle?
Buying a car will usually be a better financial decision in the long run. The monthly cost of a car payment is only a little more than the monthly lease fees.
With low dealer inventory, new vehicle prices push monthly payments through the roof.
Data shows that the average monthly payment for a vehicle in 2023 is a whopping $725, which is 11.5% higher compared to 2022. Crazy as it seems, but inflation and shortage in supply are driving both financing and leasing up.
Previously financial experts agreed that you could end up $1,000-$2000 ahead if you buy a car vs. leasing.
Reasons to Decide Leasing Might Be Right For You
Leasing Reason #1 - You enjoy a new car every few years
Leasing offers the enticing option of driving a new car every few years. A 3-year lease or a 36-month lease is typically the most common lease term.
Though leasing, you can enjoy the brand-new smell and the latest and greatest on the road. Financially it's not a big deal to you, and you want to enjoy a worry-free driving experience for a few years.
Lease signing makes sense if you want lower monthly payments with your lease agreement and drive without any headaches in your favorite brand. However nice the drive is, you should always remember that you don't have ownership at the end of the car lease, but you do have the option to purchase if you love the vehicle.
Leasing Reason #2 - Repairs are zero cost
Car lease payments are a fixed cost, and you don't have to worry about any repairs if anything should break your car during the lease contract. Typically for the life of the lease, the factory warranty covers any manufacturing defects bumper to bumper.
This option is good for individuals that want to avoid the hassle of out-of-pocket expenses of repairs after the lease is up.
However, maintenance costs like oil changes, air filters, brakes, and tires, considered wearable items, are not covered. Sometimes, some manufacturers include maintenance as part of your monthly payment.
Otherwise, you will pay out of pocket for these services and to adhere to the lease agreement to maintain the car.
Just keep in mind that you might be on the hook for any excessive wear at the end of your lease.
Leasing Reason #3 - You don't drive much
If you don't drive much and can estimate your annual mileage for your lease term, leasing might make sense to you. Leasing is popular among the younger demographic and seniors because of the lower monthly and gas-and-go mentality.
You can negotiate the annual mileage by adjusting your yearly allowance. Be sure you understand the terms because you are charged for the excess miles.
Automotive journalist, Doug Demuro, shares the latest data from the industry that excess miles on a lease will range from $.10 to $0.25 cents per mile. Your excess miles in relation to your annual mileage limit will help determine if it's worth purchasing at the end of your lease based on the penalty.
For example, additional mileage can quickly add up.
If you have 5,000 miles over from your lease, you might have extra charges based on this in the amount of $1,250 when you turn in your vehicle.
How Can I Know What Is Better for Me?
Choosing between buying and leasing depends on your specific priorities and financial situation. It's important to consider your long-term plans. This can include where you will be working, family planning, and your overall financial plan.
Be sure to evaluate the drawbacks of both financing and leasing to find the right fit.
Leasing vs. Buying a New Car
When you lease a car, you essentially rent it for a specific duration. It can be as short as 24 months to up to 5 years.
If you had a lease, you would be responsible for the lease payments for the full term. There are lease buyout options, but it might be difficult if you are trying to lighten your financial burden. You are responsible for the total amount in the lease deal.
However, when you buy the car, at the end of your loan term, you have an asset or vehicle with some market value. In addition, should you ever need to quickly unload or get rid of your car for financial reasons, you can sell the car privately.
The upside of buying, while the monthly payment is higher, is that you would have options on getting rid of the car anytime.
** On a personal note, I'm not too fond of leasing since you don't have any equity at the end of the lease. **
The Upside of Leasing: Monthly Payments
Before we get into why you shouldn't lease, let's review the benefits of leasing.
- Worry-free driving: Since the car is new, you won't have to worry about anything breaking.
- Lower payments: Affordable monthly payments are significantly less as you don't have an auto loan. It might make sense to you if you are on a lower budget. For example, $200/mo leasing vs $400/mo financing.
- Brand new car: You enjoy the feeling of driving a brand new car at a low-interest rate
- Potential Tax Advantages: If you own a business, you can write off a portion of your lease for business purposes to lower your tax obligations. Speak to a tax professional to review your options.
However, there are specific instances where buying a car makes sense.
Buying Reason #1: You plan to keep the car longer than 3 years.
If financial discipline is something you strive for, it has been shown that the longer you keep your car, the cheaper it is to continue to drive it. Granted, if you have a high repair bill, that is a different story, but financial advisors suggest that the longer you keep the same car, the less impact it has on your wallet.
Did you know that the average age of the car on the road today is 11 years old?
It's not surprising, though, due to the internet and the now common knowledge that oil changes and maintenance can do wonders in extending the life of your car. Many cars today can easily reach 100k miles and beyond with the proper maintenance.
In addition, you don't have any mileage restrictions as well. You will be able to drive without any mileage limits or excess wear.
Buying Reason #2: You want to maximize your financial gains
As mentioned previously, it makes more sense to keep your car longer financially. Here are some additional facts to consider.
While auto loan rates and auto loan financing can initially be much higher than a lease payment, it will be a better financial decision since you will end up ahead at the end of the auto loan payments.
If you can secure financing from a local credit union, you can lock in lower interest rates than dealership financing.
In a 2022 survey, credit union interest rates averaged 4.7% compared to banks which averaged 5.53% for new cars. Today, interest rates have increased, but credit unions still offer better financing options among finance companies.
Once you are about 3/4 complete on your auto loan, you will likely have positive equity in the vehicle.
Depreciation - As you might have already known, once a brand-new car is driven off the road, it can instantly lose up to 20% of its value in negative equity. Since you keep the car longer, you can fight depreciation because you are not losing any additional value and establishing positive equity.
The depreciation curve begins to flatten. Industry experts say 5 years is the sweet spot for maximizing the depreciation of a car. After five years, the depreciation rate begins to slow down, and you can maintain the value of your car with normal wear as long as you maintain it.
Lower overall costs - As a car ages, the supply chain of OEM and aftermarket parts grows as manufacturing molds are sold to third parties to make room to retool for the next generation of cars. With the market with available parts, indie shops, and available online communities, maintaining your car, in the long run, can quickly save you hundreds of dollars in costly repairs.
Consumer Reports shared that fixing your vehicle might make more financial sense, especially if you calculate the entire cost of the repair divided by the number of months you can continue to drive the vehicle.
TIP: A quick Google search of car parts and DIY tutorials can save you hundreds, if not thousands, of dollars in additional costs if you are willing to do a little wrenching yourself.
Acquire an Asset - Finally, financially, you have an asset that you can sell if you ever need to. You get to keep the car full and clear at the end of your auto loan. Did you know a vehicle with 180k miles in good condition can still fetch decent money? For example, an example like this can easily be sold as a $2,000 car for a quick flip.
Of course, if your car is newer, better appointed, and has lower miles, it can command a good price on the market. Be sure to check KBB.com for the latest prices for private parties.
Buying Reason #3: You purchase a reliable, time-test brand
Japanese cars like Honda and Toyota are very reliable. If you ask any automotive repair shop, they always recommend these brands or their luxury counterparts, Lexus and Acura, as dependable brands. They are as reliable as they get.
More recently, Kia and Hyundai are scoring well with owners and the industry for their reliability, styling, and longevity. If you purchase one of these brands, your ownership should be relatively headache-free.
European brands like Mercedes Benz, Audi, and BMW are good cars, but repair costs can add up quickly if they are all dealer-serviced. They are also reliable cars if you find the right one with good maintenance history. If you can wrench, these are fantastic cars to own and drive. Trust me. I have a fleet of them.
Overview of Pros of Buying a Car
When buying a car, there are important factors to consider. Here are some factors to keep in mind:
- Ownership: Buying a car means you have complete control and can modify it as you please.
- No mileage restrictions: Unlike leasing, buying a car allows you to drive as much as you want.
- Positive Equity: Once you finish making payments, you can continue using the vehicle without monthly expenses.
- Resale potential: If you maintain the car well, you can sell it later and recoup a portion of the initial purchase price.
Overview of Cons of Buying a Car
- Higher upfront costs: Buying a car typically involves a higher upfront cost or a significant down payment.
- Maintenance and repairs: As the owner, you are responsible for all maintenance and repair costs.
- Depreciation: Cars lose value over time, and when you sell, you may not recover the full value of your investment.
- Long-term commitment: Buying a car means committing to it for an extended period to combat depreciation.
Upfront Costs Comparison (Leasing vs. Financing)
When considering whether to buy or lease a car, upfront costs are crucial. Here are some factors to take into account:
1. Down Payment: A down payment is typically required when purchasing a car. This payment is a percentage of the total cost of the car and can vary depending on the purchase price and your credit score. On the other hand, leasing may involve a lower or even no down payment.
2. Taxes and Fees: Buying a car entails being responsible for sales tax, registration fees, and other expenses. These costs should be considered when planning your upfront budget. Conversely, when leasing, taxes, and fees are usually included in the monthly lease payments, although there may still be upfront fees.
3. Insurance: Regardless of whether you buy or lease, having insurance coverage is necessary. Insuring a leased car may be costlier due to specific requirements imposed by leasing companies.
4. Maintenance and Repairs: Both buying and leasing a car require ongoing maintenance and repairs. Car purchasing may involve higher upfront costs for warranty packages or extended service contracts. Leasing often includes a warranty that covers major repairs during the lease term.
5. Depreciation: The value of a car begins to decrease as soon as you purchase it. This can affect upfront costs, as a larger down payment may be necessary to offset the car's declining value. On the other hand, with leasing, you only pay for the depreciation during the lease term.
Considering these factors, evaluating your financial situation and priorities is essential before deciding whether to buy or lease a car. We recommend carefully weighing the advantages and disadvantages of each option and consulting with a car expert to make an informed decision based on your circumstances and needs.
Monthly payments: Leasing a car is like dating - you get to enjoy the ride without settling down while buying a car is like a long-term relationship - you commit, but you also deal with the baggage of ownership.
When deciding whether to buy or lease a car, one important factor is monthly payments. Here are some key points:
Buying a Car:
- Monthly Loan Payments: When you buy a car, you finance it with a loan. This means you have monthly loan payments. The amount of your payment depends on the car's price, interest rate, and loan length.
- Ownership: Buying a car lets you own it outright once the loan is paid off. This means you can keep the car without additional monthly payments.
- Depreciation: Cars typically depreciate over time. This means the car's value may decrease, and if you sell it in the future, you may receive less money than you initially paid.
Leasing a Car:
- Monthly Lease Payments: When you lease a car, you make monthly lease payments instead of loan payments. Your payment depends on the car's price, lease length, and mileage limit.
- Term Duration: Leases are typically for a fixed term, such as 2 or 3 years. You return the car to the dealership at the end of the lease term.
- Mileage Limit: Most leases have a mileage limit, meaning you must stay within a certain number of miles per year. Exceeding this limit may result in additional fees.
Usage and Lifestyle (Leasing vs. Financing)
When deciding between buying or leasing a car, one crucial aspect is usage and lifestyle.
Buying a car may be more beneficial if your daily commutes are long or you frequently go on road trips.
Owning a car allows for unlimited mileage and provides flexibility and convenience, particularly for individuals with an active outdoor lifestyle or those who require reliable transportation for work or family purposes.
On the other hand, leasing a car might be more suitable if you have a short commute or do not regularly drive long distances.
Leasing offers the advantage of a lower monthly payment and the opportunity to drive a newer, more expensive vehicle for a shorter period.
It is often favored by individuals who enjoy having the latest car models and prefer to avoid the long-term commitment of car ownership.
Leasing allows for easy upgrades to new models every few years.
Leasing provides flexibility if you are still determining your long-term plans or anticipate needing a different type of vehicle.
It can be advantageous for individuals who value convenience and prefer to have the dealership handle maintenance and repairs.
Most lease agreements include regular servicing.
When deciding to buy or lease a car, it is vital to consider your specific needs and preferences.
Evaluate your usage and lifestyle before reaching a final choice.
Final Words about Leasing vs Buying a Vehicle.
Buying your car is always the better choice financially. But if you are on a fixed budget and are in a pinch, then leasing is a good option, but I always tell friends and family that leasing is just renting a car. You have to return it at the end of the lease. Your money is gone.
I suggest you determine your budget and what you are willing to spend. The used car market has something for everyone, and you can look for older models to lower the costs or CPO for peace of mind.
If you have any questions, feel free to comment below. We're always happy to read your comments.