Pros and Cons of Leasing vs. Buying a Car
Leasing vs. buying a car has been a long-time debate, with people typically preferring one rather than the other. In this article we’ll discuss the pros and cons of leasing vs. buying a car.
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Leasing a Vehicle vs. Buying
As you shop for a car and start doing research into leasing vs. buying a car, there are specific differences between leasing and buying a car that may make all the difference in which option you ultimately choose.
Here are the most notable ways car loans and car leases are different:
When you purchase a car using an auto loan, you make monthly payments toward ownership of the car. As you make payments, you gain equity in the car and once the car loan is paid in full, the car is yours to keep.
If you decide you want to get a different car you can sell it or trade it in to a car dealer and receive a trade-in value toward a new car. Buying a car is ideal for people who want to own the car long-term and sell or trade it in at some point. One downside of owning a car long-term is you’ll pay for repairs after the warranty expires.
A lease is a limited time agreement,
usually two to four years, during which you use the vehicle. When the term (time) of the lease ends, the vehicle must either be returned to the leasing company or purchased for the residual value. You may not sell or trade-in a leased car. Leasing allows you to drive a new car every few years, thus avoiding costly repairs in the long-term.
All car sales will include required fees including: sales tax; a destination charge; fees that may be required by your state or county, such as title, tag and registration costs; vehicle inspection fee; and documentation fee.
As with a car sale, a lease will include documentation, tag, title, registration, and license fees. In addition, leases may require the following up-front costs: acquisition fees, security deposit, disposition fee (for handling the vehicle after it’s turned in), sales tax, and first month’s payment.
If you make a large down payment on your new car purchase, you’ll have lower monthly payments. This makes the up-front cost high. Some dealers offer zero down payment options, which would result in higher monthly payments.
Because the lease term is short (two to four years), most leases can (and should) be done with a low down payment.
When you buy a car it is with the assumption that you will keep it for at least the duration of the loan. If you want to pay off the car loan early, check with the loan company to make sure there isn’t a loan prepayment penalty.
Leasing: Returning a vehicle early
could result in a penalty fee, so make sure to read your lease agreement carefully. Voluntary termination means that you choose to end your lease before its scheduled termination. Most leases give you the option of ending your lease early. You may turn in the vehicle, pay the balance due (including any associated early termination and other costs), and end the lease. Some leases permit you to terminate early only if you purchase the vehicle.
There is no vehicle return required with a car purchase. When you buy a car it’s yours to keep, unless you choose to sell it or trade it in at some point. If you sell it while you still have a loan, then you will be responsible for paying off the loan balance.
A car lease is a short-term agreement based on the vehicle being returned at the end of the lease term. However, at the end of the lease, you may have the option to purchase the car. If you decide to purchase, you will not be charged the “disposition fee,” which is the fee that many loan companies collect for the work they have to do to the car (such as clean and make repairs) before they can resell it.
Whether purchased or leased, all cars depreciate (lose value), once they are sold. Some makes and models, even when used, will hold their value longer than others. If you buy a car and decide to sell it at some point, depending on the make, year, miles, and overall condition of the car, you could do very well selling it – even if it has depreciated over time.
If you think you may want to buy your car at the end of the lease, talk to the leasing company about residual value (also known as lease-end value), which is an estimate of how much the car will be worth at the end of the lease, based on depreciation.
This value will also be used to calculate your monthly payments. The residual value can vary depending on the leasing company’s estimate. For example
, a $10,000 car that has a residual value factor of 50% will be worth $5,000 at the end of the lease. All of the calculations made are always estimates, as precise predictions and changes to the market cannot be made. The original value of the vehicle is used, even if you have negotiated it down.
Drive as much as you wish when you buy a car. Having high mileage on your car may reduce its resale value if you decide to sell it or trade it in, but there’s no limit to how many miles you can drive, no matter how long you own the car.
All leases have mileage limits. Before you sign a lease agreement, you’ll be asked to choose the limit that works best for you. These limits are typically 10,000, 12,000 or 15,000 miles.
Driving more miles than your chosen limit will result in penalties when turning in the car. The penalty can range from 10 to 30 cents per mile. If you know you’ll be driving more than 15,000 miles during your lease term, ask for a high mileage limit option. You may pay a higher monthly payment to have more miles, but it could save you money in the long run.
Wear & Tear
Regular car care, such as oil changes, tire rotation, and regular washing and waxing will extend the life and beauty of your car. Even when driven many miles, regular care will reduce the wear and tear on the car so it retains as much value as possible. Should you decide to sell it or trade it in, you’ll get more money for it.
People who lease a car may be tempted to neglect making repairs and not take good care of the car, knowing that they will be turning it in after a couple of years. Neglecting to service and maintain your leased car is a costly mistake because at the end of the lease, the lease company will charge hefty fees for excessive wear and tear.
End of Term
There is no “end of term” with a car purchased using a loan. At the end of the loan you own the car.
Leasing is defined by an agreement with the leasing company for a specific period. When that time (or term as it is called) arrives you must turn in the car or purchase it.
Although you’re paying for your new car using a car loan, you can customize your car any way you’d like, as long as the modifications are legal by motor vehicle standards, and you maintain the appropriate car insurance.
Because a leased car belongs to the leasing company there are restrictions to modifying or customizing it, such as adding heavily tinted windows. If there are specific customized options you’d like, discuss these with the dealer before you sign the lease agreement.
Comparing the Cost of Leasing vs. Buying a Car
There are usually cost differences associated with leasing vs. buying a car, and these will be influenced by a variety of factors, including the term of a loan or a lease, the amount of money you put down, the interest rate you qualify for, and the value of the car. If you are not sure if you should buy or lease, talk to your dealership sales representative about purchase promotions vs. lease promotions and ask for an “out the door” price for both options on the same vehicle. If you know you drive a lot of miles, you may want to consider a “high mileage” lease if there’s a mile threshold that works for you. This option may cost more money upfront and you’ll need to make sure not to exceed the mile allowance. However, leasing could save you money in the long run as you will turn in the vehicle before it needs the kinds of major repairs that come from high mileage wear and tear.
How to Decide
As you can see, there are numerous options and pros and cons of leasing vs. buying a car. Buying a car has no restrictions and gives you the freedom to drive unlimited miles. Leasing a car is a great option for people who prefer to drive a new car every few years, feel comfortable keeping an eye on their mileage, and can adhere to the other restrictions that come with the lease agreement.
If you’re interested in learning more about leasing, visit your local dealership and discuss the options. You may find that leasing is just right for your wallet and your lifestyle.
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