When looking to get your next vehicle, you have many decisions to make. The make, model, and color are a few simple ones to begin with. More importantly, you need to ask yourself how you will be paying for your car. Whether to lease or buy your next car is a big decision and you’ll want to be sure you fully understand how both work for you financially and weigh the pros and cons. We break it all down for you here.
How Leasing Works
Leasing a car is like renting it. You’ll need to put down a deposit and make monthly payments until the end of the lease agreement, which is typically two to four years. The lease agreement outlines how much you have to pay at the start of your lease, how much the car is currently worth, how much it’s expected to be worth at the end of the lease, and the fees you’ll have to pay at the end of the lease.
Your cost is based on the difference between what the car’s value is when you lease it and what the dealer projects the car will be worth when you bring it back at the end of the lease.
How Buying Works
Since not everyone has $20,000 or more to buy a car outright, most people need to get a car loan in order to purchase a vehicle. This works by paying a down payment and then financing the balance — making monthly car payments until the remainder of the loan is paid in full.
Financing means you have to pay interest, or Annual Percentage Rates (APR). The bigger your down payment, the lower your monthly payment. Technically, your lender owns your car, but once you’ve made the last payment, it’s all yours.
Leasing a car can, in some ways, cost less out of pocket. Monthly payments and the deposit can be lower with a lease. Since most people lease new cars, as opposed to used vehicles, there are usually fewer repair expenses with a leased car. These later model cars are also often covered by the manufacturer’s warranty, which may include free oil changes and other scheduled maintenance.
One of the biggest advantages to leasing a vehicle is that when the lease is over, you can opt to lease another brand new car – that’s right we said brand new! Those who like to stay in new cars often prefer leasing because of this benefit. This may also allow you to afford to drive a higher-priced, better-equipped vehicle.
Another benefit to leasing is the ease of walking away. You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time for a new car.
In the long run, leasing can cost more than buying and holding on to a vehicle. Cars depreciate most at the beginning of their life, but with leasing, that’s exactly when you’re paying for it. Any expendable items, such as tires, are often still your responsibility. Your credit score may also affect the selection of cars you’re able to lease.
There are also potential fees and penalties with leasing, like for any damage or modifications to the vehicle or getting out of the lease early. Some auto insurers may require higher rates for leased cars, as well. It can also be even more complicated if you get into an automobile accident in a leased vehicle than in a car you own.
Many restrictions go along with leasing a vehicle. You might not be allowed to take the car with you if you move to a different state. Customizing the look or features of your car during the lease can incur fees. Also, lease contracts specify a limited number of miles, so if you go over that limit, you’ll have to pay an excess mileage penalty.
One of the benefits of buying a car is that you can do anything you want with it, like making modifications and driving as many miles as you want. Though the car is technically owned by the lender (unless you paid outright), the only requirement you’ll usually see is a minimum amount of auto insurance coverage.
When you’re ready for a new car, it helps to have the positive equity from your old car, meaning the cash left over from the sale of your previous car can be used to make a down payment on the next one, potentially saving you money. Once you pay off a loan on a car you’ve purchased you own the car outright and your only expenses include maintenance and repairs. You can also purchase a used car, saving money.
Buying a car can be more expensive up front. The down payment would likely be higher than with a lease and the monthly payments on your loan can also be higher than lease payments. Repairs and maintenance costs can also add up for car owners. Poor credit can also affect the cost of your loan payments and deposit. Not to mention, when buying a car with an auto loan, you are incurring a large amount of debt.
Another con is if you go with a longer-term loan. A seven-year loan, for example, will mean lower monthly payments than a five-year loan, but it will also mean paying a lot more money in interest.
Your car’s value will depreciate over time. If the car loses value faster than you pay down the loan, you may end up with negative equity. This can especially be a problem if the car is totaled or you want to sell or trade it in. In this case, you will still need to pay the difference to your lender.