You’re in the market for a new car, but you aren’t sure if you should lease or buy one. Each decision has its pros and cons, of course, but there are some other factors you should consider when deciding.
It’s not a one-size-fits-all answer – some people benefit more from buying a car while others benefit from leasing.
Here are the questions to ask yourself to decide.
Leasing vs Buying a Car – What’s the Difference?
Leasing and buying a car both have the same result – you drive off the lot with a new car. But the similarities end there.
Leasing and buying a car are two different things. One gives you access to new cars frequently, while the other gives you ownership of a car with fewer restrictions. Which one is right for you depends on your financial means and your goals.
What Does it Mean to Buy a Car?
When you buy a car, you either pay cash for the entire purchase price or you make a down payment and finance the rest. If you pay all cash, you receive the car’s title right away and you are the full owner of the car.
If you finance it, the lender holds onto the title for collateral until you pay the loan off in full. If you miss too many payments, they could repossess the car since the car is the collateral. Car loans typically have affordable rates unless you have bad credit or other risky factors.
When can you Sell the Car?
When you buy a car, you aren’t under any obligation to keep it for a specific length of time. If you decide after a year or two that you don’t like it, you can sell it. Of course, you should figure out if it makes financial sense to do so.
Remember, if you want to buy another car, you’ll need a down payment again. If you put all your capital into the previous car you owned, you might not have much to put down on the car or you might lose more money than you would have if you leased the car for a couple of years.
Questions to Ask yourself When Buying a Car
Do I have the money for a down payment?
Every dealer and lender is different, but on average, you’ll need at least 10% down on the car you buy. If you have a trade-in, you can use that as your down payment if it’s 10% or more of the price of the car you want to buy.
If you don’t have a trade-in, you’ll need cash equal to 10% or more of the car’s price. Some lenders allow a lower down payment and some require a higher payment. It depends on your qualifying factors.
If you have great credit, you might get by with no money down. But if you have a low credit score or high debt ratio, you might have to put more money down.
Do I have great credit?
You don’t need perfect credit, but the higher your credit score is, the better loan terms you’ll get. If you’re applying with the dealer, they may have bad credit car loans available, but read the fine print and know the loan’s total cost.
Interest and fees can really increase the car’s price and make it more unaffordable than you thought.
Will I keep the car for the long term?
When you buy a car, typically it pays to keep it for at least 5 years. If you sell cars too often, you’ll lose money. When you drive the car off the lot you already lose as much as 20% of its value. Keeping the car and paying the loan balance down will ensure that you don’t get upside down on your loan and owe more than the car is worth.
Can I handle the car’s maintenance?
When you buy a car and keep it long-term, you are committing to maintaining the car. Since car warranties don’t last forever, you’ll need to be able to afford the car’s repairs which could be major depending on how long you keep the car and how much you drive it.
What Does it Mean to Lease a Car?
When you lease a car, you don’t pay full price for it. Instead, you pay only the depreciation for the lease term. For example, if you lease the car for 3 years, you’d pay the expected depreciation of that make and model for 3 years plus lease fees.
Each car depreciates at a different rate. If you wonder how much a car will depreciate and what the lease payment will be, shop around with different leasing companies to get quotes.
You never own a car when you lease it. At the end of your lease term, you turn the car into the leasing company or if it’s in your lease agreement, you can do a lease buyout which means you pay the car’s residual value and then own the car.
If you turn the car in, the only money you would owe is if you went over the mileage, caused damage to the car, or the car needed excessive cleaning. Your lease agreement would detail what those costs would be.
Lease Buyout and How it Works
Some lease companies give you the option to buy the car at the end of the lease agreement. You’ll know if they have a buyout option because it will show up in your agreement. If you can buy out the lease, you’ll pay the car’s residual value.
The residual value is the difference between the car’s current value and the depreciation you already paid. Don’t assume all leasing companies are honest in their values, though. You might find inflated residual values, meaning that the car will cost you more if you buy it out.
Before you buy a lease out, make sure you do your research. Use Kelley Blue Book or Edmund’s to determine how much a car is worth. If the buyout price is much higher than the car’s current value, you’d be entering a bad investment and should look elsewhere.
Questions to Ask Yourself When Leasing a Car
How many miles do I drive per year?
If you drive a lot, leasing a car isn’t right for you. Leasing companies limit how much you can drive, typically to 12,000 to 15,000 miles per year. If you go over the mileage, you’ll a fee that’s charged per mile you went over.
If you travel a lot or commute far to work, leasing may not be to your benefit.
Do I have great credit?
You typically need much better credit to lease a car. While you could likely get a bad credit car loan, there is no such option for a lease. If you have a credit score below 680, you may not be eligible to lease a car.
Do I want a new car often?
When you lease a car, it’s usually for 2 or 3 years. This means you’re getting a new car that often. Each time you get a new car, you must make a down payment on the lease and pay the tax, title, and license.
If you like having the newest cars, this can be a great advantage for you. If you don’t care about the latest models or don’t like getting new cars, though, leasing may not be for you.
Can I afford lease payments?
When you buy a car, you pay your loan balance down and once the loan is paid in full, you have no more car payments. This doesn’t happen with a lease. You always have a payment unless you buy out a lease or switch from leasing to buying.
If you jump from one lease to another, though, you’ll always have a lease payment which could make it hard to save for other financial goals.
Key Takeaway
Leasing or buying a car could be the right decision for you, it just depends on how long you want to keep the car, how much you drive, and how much maintenance and repairs you want to worry about (if at all).
Don’t assume one is better than the other – compare your options on the car you want to lease or buy and see which one makes the most sense.
