If you’re in the market for a car, you have the option to buy or lease it if you aren’t paying cash outright for the car.
Many people are opposed to leasing and will only buy cars and vice versa, but how do you know which one is right for you.
Here’s everything you must know about the difference between buying and leasing a car.
The Basics of Buying or Leasing a Car
Understanding how buying or leasing a car works can help you decide which is right for you.
Buying a Car
When you buy a car, you invest in the asset. You are the owner of the car, although the bank holds the title until you pay the loan off in full. You make monthly payments toward the loan, paying both principal and interest.
When you pay the loan off in full, you are the rightful owner of the car and can do what you want with it whether you keep it or sell it.
Leasing a Car
When you lease a car, you don’t own it. You ‘rent’ it from the leasing company and must abide by their rules which include how many miles you can drive per year, what condition you must keep the car in, and when you must turn the car in.
At the end of the lease, you don’t own the car – you turn it in to the leasing company unless you decide to buy it from them, which some leases allow.
Your payments are based on the estimated depreciation the car will have throughout the time you have the lease agreement.
Buying a Car vs Leasing a Car: Payments
A main area of focus when deciding if you should buy or lease a car should be the monthly payments. Typically, a car loan has higher payments than a lease because you’re paying back the full sales price of the car, whereas, with a lease, you only pay the depreciated value of the car during its term.
Car Payments
Car payments are made up of principal and interest. You borrow the difference between your down payment and the sales price. The lender charges you interest on the amount you borrow. Your interest charges are the highest at the start of the loan when your principal balance is high and they decrease as you pay the balance down.
You can choose a term of 2 – 7 years for a car loan. The less time you borrow the money for, the higher your payment but the sooner you pay the loan off. Loans with longer terms usually have higher interest rates too.
Lease Payments
Many leases don’t require a down payment or if they do, it’s small. Your payment is based on the amount they expect the car to depreciate during the lease term. The longer your lease term is, the higher the payment will be.
At the end of your lease, you can turn the car in and owe nothing (if it’s in good condition and you didn’t go over the mileage) or you can buy out the lease by paying the car’s residual value or the car’s current value minus any depreciation already paid.
Some lease companies add other fees to the buyout too, so it’s always important to ask the lease company what the final price is before deciding.
The Benefits of Leasing a Car
At first glance, leasing seems much better. You get a lower payment and can turn the car in and get another one whenever you want. But there are downsides too.
First, let’s look at the benefits of leasing a car.
You Drive a New Car
New cars usually have less trouble than older cars. This means less money out of pocket for repairs. Most leased cars are under warranty and the only maintenance you must pay for are the routine tasks that every car needs like an oil change or maintaining the tires.
You can Always Drive the Latest Model
If you take 2 – 3-year leases, you can continually drive the latest model car. If you bought a car, you probably wouldn’t have the flexibility to buy new cars every couple of years considering the hit most car owners take in depreciation.
You Might be Able to Afford a More Luxurious Car
It’s not a reason to spend more than you should but with lease payments lower than car payments, you might be able to drive a nicer car than you could afford if you financed it.
You Don’t Have to Sell the Car
Selling a car or trading it in can be a hassle. Most car owners don’t get what they want for the car or they find out it’s worth much less than they anticipated. Even if the car is worth as much as you wanted, there’s no guarantee you’ll sell it right away. If you trade it in to a dealer, chances are you’ll get less for it since dealers are known for low-balling trade-ins.
The Downsides of Leasing a Car
The lower payments and ability to have a new car every couple of years can feel amazing, but there are some downsides of leasing to consider.
You Have no Equity in the Car
You pay the highest level of depreciation on the car since it has its most depreciation during the first couple of years. You then turn the car in and have nothing to show for it. If you bought the car, you’d have the car’s value minus any outstanding loans to use to buy your next car.
Your Mileage is Limited
You can only drive the number of miles stated in your lease each year. If you go over, you’ll pay an excessive mileage fee, and it can be as much as $0.50 per mile you are over.
You Might Owe Excessive Wear and Tear Charges
You must return the vehicle in great condition, or the lease company can charge you for the damages. It’s like renting a car and returning it in a condition other than you received it. Lease companies expect the car in great condition.
The Benefits of Buying a Car
Buying a car has its benefits even though it will cost you more upfront and monthly. Here’s what you should consider.
You Own the Car
Once you pay off your loan, you are the proud owner of your car. You don’t need anyone’s approval to make changes to it even when you have the loan, and you can decide what to do with it once you no longer owe the bank money.
You can Drive as Much as you Want
You don’t have to worry about mileage restrictions when you own a car. You can drive it as little or as much as you want. Excessive wear and tear might affect the car’s value, but you won’t have to pay anyone any penalties for the wear and tear.
You can Sell or Trade Whenever you Want
When you lease a car, you must abide by the lease agreement. If you want to trade it in sooner you could pay a prepayment penalty. If you own a car, you can do what you want with it whether that means keeping it for 20 years or selling it after a year or two.
The Downsides of Buying a Car
Like leasing, buying a car has its downsides that you should consider too.
Monthly Payments are Higher
When you buy a car, the payments are higher because you’re financing the full sales price, not just the depreciated value like you would when you lease a car.
You’ll Need More Money Down
When you buy a car, you need a down payment. It doesn’t have to be huge, but 5% – 10% down is usual. If you don’t have a down payment, you can also use a trade-in if you own another car and want to sell it to use the money to buy the new car.
Maintenance Costs may be Higher
Most people own cars for much longer than they would lease them and when cars get older, they need more repairs. This can mean you’ll put more money into the car than you would if you leased it.
Key Takeaway
Make sure you always compare the total cost of both leasing and buying a car. Look at the bottom line and figure out which would benefit you more financially.
