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Key takeaways:
- Both leasing and buying offer benefits and drawbacks; the best choice for you depends on your budget, annual mileage, and ownership goals.
- You’ll still need to budget for insurance and maintenance; here’s where cost differences between buying and leasing differ more.
- Leasing costs you more in the long run because you’ll always have a monthly payment, but if you like to trade in your car every few years for a new model, leasing may be a better choice for you.
Do you love that new car smell?
If it’s time to get a new car, you have some decisions to make. Once you choose your make, model, and color, you’ll also need to decide whether to lease or buy. There’s no right or wrong answer here; your decision depends on your budget, how you’ll use your car, how many miles you drive each year, and how many years you’d like to keep driving it.
If you like driving the latest model car but you have a smaller budget, leasing can be a good way to go. Buying can cost more each month, but you have the freedom to drive as much as you like, and you’ll end up owning your vehicle once you’ve paid off the loan.
Not sure which is best for you? Let’s map out your options.
What’s the difference between leasing and buying a car?
It all comes down to ownership. When you buy a car, your lender owns it until your loan is fully paid, and then you become the owner. But when you lease a car, the leasing company retains ownership of the car throughout your lease term and after the lease ends. You’re simply paying them to use it.
When you buy a car, you either pay cash up front, or get preapproved and then take out an auto loan, making monthly payments over time. Along the way, you build equity—that is, you own a bigger portion of the vehicle over time—until the loan is paid off and the car is completely yours.
A lease is like a long-term rental; you make monthly payments to use the vehicle for a certain amount of time—usually two to four years. You do not build any equity; you have no ownership at any time and at the end of your lease term, you must return the car to the dealer. At that point, you may have the option to buy it for a price which was listed in your original lease agreement.
The cost of an auto lease is based on the car’s residual value, which is its depreciated value at the end of your lease agreement. This means cars that maintain their value over time usually have lower lease rates. Lease agreements often have down payments; you may also need to pay other fees, including an acquisition fee, sales tax and licensing, disposition fees when you return the car, and fees for wear and tear.
Leasing a car
Do you like to trade in your car for a new one every few years? Then leasing may be a good option for you, although it does have some drawbacks...
Benefits of leasing a car
- Leasing comes with a smaller down payment and lower monthly payment. It’s even possible to lease a used vehicle, which would save you even more, although these deals are less common.
- Gives you more options when deciding on a make and model. If you continually lease, you can upgrade every few years to new cars which have the latest safety features and state-of-the-art technology.
- Since the vehicle is new, you’ll benefit from warranty protection and lower maintenance costs for the years of your lease, which can save you money.
Drawbacks of leasing a car
- Mileage matters. If you drive a lot and exceed the mileage limits listed in your lease contract, it can be an expensive penalty. In fact, if your lease has a particularly low advertised monthly payment, be sure to check the mileage limits to make sure the terms will work for you.
- You’re stuck with the car until your lease ends. Some lease agreements allow you to end your lease early, but at a cost.
- You can make a larger down payment to lower your monthly lease rate. But, if you do so and the car is a total loss due to accident or damage, the insurance will pay the leasing company for the vehicle and not you, and you’ll lose your down payment.
- You will never own the car unless you purchase it at the end of your lease.
Buying a car
Do you prefer to own your own vehicle? Drive as much as you want or go off-roading? Buying a car gives you full control over how and where you drive. Plus, when you buy, you have a choice between getting a used or new vehicle. Both come with advantages and drawbacks, but either way the car is yours in the end.
Benefits of buying a car
- You build equity and own the vehicle once you’ve fully paid your auto loan.
- Buying gives you the flexibility to make a larger down payment that will lower your monthly loan payments; you can also choose to buy a used car which saves money.
- You have fewer limitations in terms of how many miles you can drive each year, whether you’re allowed to tow a boat or trailer or add a bike rack, tint the windows, and more.
- You can buy, sell, or trade the vehicle anytime you want.
Drawbacks
- Buying requires a bigger down payment and higher monthly payments.
- Cars depreciate over time, and as the owner you bear the cost of this depreciation. In fact, because of depreciation, cars can lose a significant amount of their value in the first three years.
- You lose out on advances in technology; you won’t always have the latest in terms of safety features unless you trade in for a new vehicle every few years.
- Once the car is out of warranty (typically three years), any cost of covered repairs will be your responsibility.
Things to consider
Regardless of whether you decide to lease or buy a new car, there are a few things you still need to do.
1. Negotiate the best deal
Good credit helps you succeed with both buying and leasing because it gives you the ability to negotiate the best deal possible. For example, while leasing comes with some things you can’t negotiate (such as the residual value), you can bargain for other things like the down payment or the acquisition fee if you have good credit. And if you decide to buy a car, getting pre-approved for an auto loan can give you better negotiating power allowing you to focus on negotiating the price instead of figuring out financing.
2. Take advantage of the manufacturer’s warranty
When you lease a new car, it should come with all the same factory warranties as if you bought it. And since most manufacturers’ warranties extend three years, a lease of the same length keeps you fully covered throughout your lease term. If your lease is longer, you may want to consider an extended warranty, either through the factory or the dealer. Be careful, though, and don’t feel pressured; it pays to shop around and compare costs and coverage.
3. Budget for the right insurance
When you buy a car using an auto loan, your lender will have certain insurance coverage requirements. The same holds true when you lease a car; the coverage requirements will be outlined in your lease agreement. In general, the fact that you’re insuring a leased car doesn’t affect your insurance rates, but if you lease a more expensive vehicle than you would buy, this will certainly increase the amount you will pay. And, if you continually lease newer vehicles, this will also cost you more over time.
There are ways to save on car insurance with both lease and buy options. Good credit helps, as does bundling. Some auto leasing companies include Guaranteed Asset Protection (GAP) in the cost of the lease; GAP coverage may be something you also want to consider when you purchase a new car. Regardless of whether you buy or lease, check with an insurance broker from Global Credit Union Insurance Brokers to compare quotes from the nation's top insurance companies for your auto coverage.
4. Follow recommended maintenance schedules
Of course, when you purchase a new car, it’s in your best interest to take good care of the asset. Regular maintenance and things like proper winterizing are smart moves. Maintenance is still important with a leased car since you will be charged for excess wear and tear on the vehicle if you fail to take care of it. Most maintenance requirements are covered in your lease agreement. Be sure to keep all maintenance records to avoid penalties at the end of your lease.
Final thoughts
Buy or lease—which is best for you? There’s really no right or wrong answer.
In the long run, it’s more expensive to lease a car instead of buying and driving it for years. And you’ll never own the vehicle, which means you’ll always have a monthly payment. But if you like that new car smell and if you’re sure you won’t exceed the mileage limit, a lease may be a good option for you. In addition, if you’re thinking about getting an electric vehicle but are not sure if it will fit your lifestyle, a lease may help you test it out.
Whatever you decide, drive safely!
