Learn about the differences between buying and leasing a car
New car owners are often stalled when it comes to the question; should they buy or lease their car? The various advantages and disadvantages of both can seem overwhelming and confusing, but when approached in a systematic way a prospective car owner can easily determine which option better fits their particular situation.
Buying a Car
In general, purchasing a new vehicle requires some method of financing. If you are fortunate enough to purchase a car, outright, with cash, there are several advantages. The biggest advantage to buying a new car with cash is immediate ownership (bypassing any interest), allowing the owner to sell or trade-in the vehicle, move the vehicle across state/country lines, drive an unlimited amount of miles, and be free of charges for excess wear and tear.
In some cases manufacturers provide extra rebates to customers looking to purchase a new vehicle and even offer promotional financing. Promotional financing can often include 0% interest. This allows a potential customer, who doesn't wish to take out a loan, to divide the cost of the vehicle into manageable monthly payments, without paying any interest.
That being said, buying a car does have its disadvantages. The monthly payments on a purchased vehicle tend to be higher because the owner must compensate for the total cost of the vehicle, interest rates, and taxes or other fees. For this reason, many customers can lease a more expensive car for the same cost as purchasing a new car. The up-front costs of purchasing a new vehicle are also higher than the ones associated with leasing due to a larger down payment, registration fees, sales tax, and other miscellaneous charges.
Another downside of buying a vehicle is depreciation. From the moment a car is driven off of the lot the market value of the car starts to drop. When a vehicle is purchased, the depreciation is a burden for the new owner, reflected in the lower resale value. Ironically, since many customers cannot afford to pay for the total cost of the vehicle up-front they take out loans to help make their purchase. These loans typically come with interest rates, which means the customer is paying interest on an item that is continuously losing its value.
Many customers look at upfront costs and determine leasing a vehicle is the most cost effective route, but when costs are measured over the long term buying a vehicle becomes the most fiscally responsible route. Over the years the insurance costs for a purchased vehicle will drop and monthly payments will eventually cease. Maintenance costs may be greater than a leased vehicle but the owner will have built equity and own a car that is still worth some portion of its original value. For these reasons, if you plan on driving a vehicle until the wheels fall off, buying a car, either through financing or a cash purchase, is the right route for you.
Leasing a Car
Leasing a car, although more expensive over time, does have many distinct advantages. Lower down payments, and in some cases no money down, make for cheaper monthly payments. Monthly payments also tend to be lower because the customer is paying for the depreciation of the vehicle over the time of the lease as opposed to the total cost of the car. Leasing also allows customers the freedom of driving a new vehicle every few years without the risk of being stuck with a vehicle's future, deflated, market value. Additionally, any taxes paid on a lease will be less than the taxes paid on a purchased vehicle, because the customer will only be taxed on the amount paid during the lease.
The cost of maintenance on a lease vehicle, when responsible measures are taken to follow the lease terms, tend to be lower due to the coverage provided by the factory warranty. Most manufacturers offer a standard 3-year/36,000-mile warranty (there are some manufacturers that offer longer warranties and extended warranties) that conveniently covers the standard 3 year lease. That means any issues with the vehicle, that aren't owner induced, will be fully covered at no extra charge. An added bonus to leasing is if the owner decides they would like to own the vehicle they can always exercise the purchase option once the lease has been completed.
Though leasing has several perks, there are a few drawbacks. Lease terms include a fixed amount of miles the customer can drive over the duration of the lease and any extra miles will result in a fine, typically charged by a fixed rate per extra mile. This mileage limitation can hinder the amount of trips that can be taken with the vehicle. Dealerships can also fine for any excess wear and tear, including everything from worn tires to stains on interior upholstery. Insurance rates also tend to be higher for lease vehicles since lease coverage typically includes gap insurance; insurance that will pay off what is still owed on the lease in the event that the vehicle is totaled. Some lease agreements also restrict relocation by prohibiting the customer from moving the car to another state or country.
Lifestyle and Buying vs. Leasing a Car
At the end of the day the choice to buy or lease a vehicle is less of a financial decision and more of a lifestyle choice. There is never a clear right or wrong way to go about acquiring a new vehicle.
For those customers who don't drive as frequently, would like lower monthly payments, want to avoid the hassles of owning a vehicle, enjoy the idea of driving a new car every few years, and know they can avoid any excess wear, leasing is the right option.
On the other hand, customers who wish to own a vehicle, save money in the long term, drive excessively, sell or trade-in the vehicle, or move the vehicle with them across state/country lines, buying is the right route.
To make the correct decision for your particular situation, weigh the benefits of either method and determine which one better aligns with your desires.