When it comes to buying and leasing cars, there’s no one-size-fits-all answer. There are a slew of details to consider before you decide whether to buy or lease: your budget, driving needs, lifestyle, cash on hand, and credit history–just to name a few. Leasing is similar to financing the purchase of a car, but there are some differences. Here are some of the key differences, which should help you make your decision.
[Related: Improve Your Credit Worthiness]
If you like to get a new car every few years, a lease is probably the better option. A lease requires a significantly lower down payment and monthly payment compared to buying a vehicle. Many car leases require anywhere from $0 to several thousand dollars up front, with a negotiable down payment. If you put a small down payment, remember that your monthly lease payments will be higher.
A car loan is based on the full price of a new car, while a lease is based on only a percentage of the car’s price. For example, on a $30,000 car, you’d finance the entire $30,000 purchase price with a car loan. With a car lease, you only pay the difference between the car’s price and what it’s expected to be worth at the end of the lease, which is a car’s residual value.
Put the brakes on long road trips. Leasing locks you in for a specified term and limits the number of miles you can drive. Typically, mileage restrictions are 9,000, 12,000 and 15,000 miles a year. It’s important to estimate the amount of miles you drive annually so you can determine how many miles to purchase. Also, breaking a three-year lease after two years means you’ll have to pay the remainder of the lease, in addition to any termination fees in the contract.
Dings or custom
rims? Not so fast. You will be charged extra at the end of the lease for anything that decreases the resale value of the car. That includes paying to fix any abnormal wear-and-tear, scratches and dings. At 10 to 15 cents per mile, that can become a major cost. Also, if you’ve customized the vehicle in any way, even if it seems like added value to you, you will probably have to pay extra at the end of the lease.Sometimes, minor alterations to the vehicle that can be reversed before you turn the car back in but, generally, major alterations are a no-no. Make sure you read the lease contract carefully before signing.
‘Lease’ is really a fancy term for long-term rental. You are paying interest to finance that car without building any equity. That means that when the lease ends, you have only the memories.
No mileage or customization restrictions.
If you prefer holding on to your vehicle for as long as possible and drive considerably, buying is probably better for you. When you buy, you own the car when the loan is paid off. Until then, the lender owns the vehicle. But as you continue to make loan payments, you’re accumulating equity in the vehicle. Once you’re done paying off the loan, the car is all yours — no more monthly car payment in your budget. You can sell when you want and pocket the cash, or use it as a down payment on you next car.(Continued on next page)
Disadvantages of Buying
New cars depreciate the second they roll off the lot. So when you buy a new car, you roll the dice with its resale value. It’s hard to determine what the vehicle will be worth when you’re ready to trade it in or sell it. With leasing, that future value is predicted
up front and put in writing on the contract. If your car is worth less than the car loan, you have negative equity (also known as being upside down on the loan). This is only a drawback if you plan on selling or trading it in because you’ll have to come up with the difference between what the car sells for and the amount of money still remaining on the loan.Chances are you’ll need a sizeable down payment of up to 20% when taking out a car loan, not to mention a solid budget that allows you to comfortably handle monthly payments. Auto loans can last five to seven years. A longer loan term adds to your interest, so you end up paying more for the car than if you had a shorter loan term. A larger down payment will also help lower your monthly payments when you finance.