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Leasing Versus Buying a Car
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Thinking about the financial benefits of leasing versus buying a car can feel like an overwhelming decision. Buying might mean plunking down a large amount of cash all at once, but you wind up with a car owned outright in the end. Leasing usually means smaller payments, but you’re stuck in a loop of always paying for a vehicle.
The good news is that there are a few car-buying basics that you can use to help guide your decision. As New York-based Certified Financial Planner Doug Flynn tells his clients, the best way to decide is to “make it a math decision.” By comparing costs on the specific car you’re considering side-by-side, you’ll be able to make the best choice for you and your family. We’ll walk you through the steps, whether you’re new to the car-purchasing experience or a seasoned buyer.
- What are the benefits of leasing a car?
- What are the cons of leasing a car?
- What are the pros of buying a car?
- What are the drawbacks of buying a car?
- How do you decide between leasing a car versus buying a car?
- The bottom line
What are the benefits of leasing a car?
Leasing a vehicle means that you pay a certain monthly fee to use a vehicle for a set period of time — usually anywhere from 24 to 48 months. It is common to lease a brand new vehicle, but some manufacturers offer leases on used vehicles, too.
There are a wide variety of leases available to fit your budget and your needs. A lease can offer a number of benefits, such as:
- You always have a new car: Most standard leases last for anywhere from 24 to 36 months. Once your lease ends, you return the vehicle to the dealership, pay any termination fees (plus overage fees) and you can lease or buy another car.
- Your monthly payments can be lower: The average monthly cost of a lease is $458, according to Experian. The average monthly payment to buy a new car is about $550, more than the average mortgage, according to LendingTree.
- You can make a smaller down payment: Putting money down on a lease is known as a capital cost reduction. While you can put a down payment on a lease to reduce your monthly payment, Flynn tells his clients to only put down the cost of taxes and title. “The idea of using capital cost reduction or putting money down to reduce the monthly cost of a lease is largely a false savings,” he said. “You’re essentially pre-paying to reduce the monthly payments, and tying up your money,” noting that it could do more for you otherwise, especially if you are trying to invest in other ways like retirement or college savings.
- You may be able to afford a more luxurious (and expensive model): Because you’re only paying the portion of the vehicle’s depreciation for the time you have it, you might be able to afford more car than you could if you decided to purchase. “Just be careful and really look closely at the details of the lease,” Flynn said. “In some cases, the deal is simply too good to be true because the mileage is extremely low, or you have to put down a good chunk of money to get the payments down.”
- There can be tax advantages for business owners: Leasing can offer tax benefits for business owners including being able to deduct mileage and claim lease expenses to offset taxes.
- Maintenance is generally included in a lease: Manufacturers like Kia, BMW and Jaguar, offer included basic maintenance coverage of some sort in a lease deal. That means you will have to shell out less additional cash for oil changes and regular maintenance items if you lease a vehicle. Edmunds, the car-shopping website, offers a list of vehicle maintenance programs and their costs.
What are the cons of leasing a car?
While leasing a car might seem like a fantastic deal, there are some drawbacks to consider. They include:
- You don’t own the vehicle at the end of the lease: This is one of the biggest drawbacks to leasing. While you make payments throughout the life of the lease, you don’t get to keep the car to sell, and potentially recoup any of those payments at the end of the lease. Leasing a car is a lot like renting an apartment — you’re just paying for the part you use, and you don’t gain any equity.
- Going over the mileage will cost you: When you lease a car you agree to drive it only a set number of miles per year. This helps reduce wear and tear on the vehicle so that when the dealer gets it back, they can resell it for a good price. Most leases offer only 12,000 to 15,000 miles per year, though some offer more — Kia, for example, offers a 25,000-mile lease. Still, it may well cost you: each mile that you add beyond that limit will cost you anywhere from $0.20 to $0.25 per mile, and that can add up to a big bill at the end of the lease should you go over the mileage limits of your lease.
- Excessive wear and tear can cost you: In addition to mileage limits, leases can also be costly when it comes to wear and tear. Lease terms vary but, in most cases, a dealership will charge you a set of fees for any excessive physical damage to your leased vehicle. Excessive wear and tear can include things like stained upholstery, damaged interior, chipped windshields, dents and scratches on the body, damaged fenders and excessive tire wear. Be sure to read your lease agreement closely to find out more about the potential charges you might face for excess wear and tear.
- It can be expensive to get out of a lease early: If your financial circumstances change and you need to get out of your lease early, the price can be high. In general, leasing companies will charge you a termination fee (the amount of which could vary), and you’d also be charged the remaining balance of the lease. If you do find you need to get out of your lease early, there are ways to do it.
What are the pros of buying a car?
Make no bones about it, new cars are getting more expensive: an average of $37,401, according to Kelley Blue Book (as of August 2019). Used is almost always going to be cheaper: Edmunds says the average transaction price of a used car is around $21,000.
And people are borrowing more in order to afford them — the average car loan amount climbed to $32,928 in September 2019. Meanwhile, Americans as a whole hold $1.3 trillion in auto debt.
All of those numbers add up to quite a bit of scratch, no matter which type of vehicle you decide to buy. There are, however, a number of pros of buying a car.
- When you pay off the loan, you own the car (and you can sell it at any time): It seems pretty straight forward, but it’s worth calling out — at the end of your loan, you own the vehicle and can sell it should you need or want to. Because you own the vehicle, you have equity in it and can recoup some of the expenses when you sell the car.
- No more car payments: Once you pay off the loan you will no longer have any car payments to make and will own the vehicle outright.
- Insurance premiums can be lower: When you purchase a car, your insurance premiums could be lower. If you purchase used, you may need less insurance to cover the cost of the vehicle since it has already taking that new-car depreciation hit. If you purchase new, you’ll most likely still need to carry comprehensive insurance and in some cases GAP insurance as well. Most leases require that you carry more insurance, which raises the price. If you want to compare the costs of insurance for free, check out the LendingTree insurance comparison tool. Additionally, some insurers like Allstate and State Farm offer lease versus buy calculators to help you do the math.
- You can make it your own: If you like to customize your car or modify it in any way, buying is likely the right choice for you. Leases don’t allow for modifications, and it can cost you big time when you turn a modified lease vehicle back in.
What are the drawbacks of buying a car?
While buying a car may seem like the best way to have a reliable vehicle, there are some drawbacks to consider. These include:
- Monthly payments tend to be higher: Since you are going to be financing the total cost of the vehicle, most likely folding taxes and other fees into the loan, monthly payments will tend to be higher, Flynn said.
- Maintenance and repairs can be costly: Maintenance and repairs can really put a dent in your budget. As cars age, they require more maintenance and repairs. Be sure to take this into consideration if you purchase a car. Be especially aware of this factor if you choose to keep the car beyond its warranty, Flynn said.
- You’ll be responsible for selling it: When you get tired of your car, or you want to recoup some of the cash you put into it, you’ll be solely responsible for selling it and there are plenty of things to know about selling your car, especially if you still owe money on it.
- It won’t be new forever: Flynn says that it’s important to consider what kind of car owner you are. “If you like having a new car every three years, then buying is probably not for you,” he said. “You’ll never get back the money you put into a new car if you are buying and financing a new one every three years.” If you want the latest and greatest technology, leasing is probably a better bet for you.
Leasing versus buying a car: how do you decide?
|Ownership||You own the vehicle outright at the end of your loan. You can sell it at any time and recoup some of the money you invested in it.||You don’t own the vehicle at the end of your lease. It goes back to the dealer. Breaking a lease early can be extremely costly.|
|Monthly Payments||Payments tend to be higher since you are paying off the entire value of the car.||Payments tend to be lower since you are only paying a lease for the portion of time you use the vehicle.|
|Maintenance, Wear & Tear||You’ll be responsible for most of the maintenance (new and used cars come with limited warranties that cover some maintenance items). You’ll also be responsible for repairing any wear and tear on your vehicle.||Many car companies offer maintenance plans that cover basic things like oil changes and brakes as part of the lease. Any excessive wear and tear on the vehicle will cost you at the end of the lease.|
|Mileage||You can put as many miles on the vehicle as you want or need.||If you go over the mileage agreed to in your lease you will be responsible for paying the overage fees at the end.|
|Modifications||You can modify the vehicle in any way you want.||You cannot modify the vehicle in any way you want.|
Flynn advises his clients to let the numbers make the decision for you when choosing between leasing versus buying a car. He advises clients to never spend more than 10% of their take-home pay on car payments alone, and not to spend more than 20% of their take-home pay on the total vehicle costs (insurance, parking, gas, maintenance etc.).
“While these are common rules of thumb,” he said, “they can be hard to stick to because the price of vehicles have gotten so high. The best thing you can do is run the numbers yourself and figure out what is in your price range. Once you know that, you can actively make the choice to go above those.”
To help decide between leasing versus buying, Flynn tells his clients to stick to three steps to determine the right financial path forward.
- Focus on the specific vehicle that you want: Flynn says that shopping a monthly payment is a common trap that people fall into. “Shopping payment alone gives people a false sense of what they can afford,” he said. “You have to take into consideration the total cost of the vehicle including insurance, maintenance, taxes and fees and even gas.”
- Get the out-the-door price: Get the total cost of the vehicle so you know what kind of financial obligations you will have.
- Run the math as if you were going to put $0 down: Flynn says that the best way to compare apples-to-apples is to run both the lease deal and the buying deal with zero money down.
Once you have done that, he says you should gather the following numbers to help you decide between buying versus leasing.
- End of lease buyout: How much will it cost to buyout the vehicle at the end of a lease? This number will help you determine if it’s better to lease or buy a vehicle. This is known as residual value — it is the value of the vehicle at the end of your lease, after depreciation.
- Taxes and title cost: Determine what taxes and title will cost you if you buy the car and if you lease it.
- Insurance costs: In some cases insuring a leased car can be more expensive because you will have to carry more coverage, possibly including GAP insurance. Be sure to call your insurance company to find out what the cost might be for both leasing and buying, so you can factor it into your decision.
- Gas, parking and maintenance: Today’s vehicles often require premium-grade gas that’s more expensive than regular gas, which adds up over time. You should also consider the cost of parking and maintenance. In some cases, leases include scheduled maintenance which can cut down on the cost.
Once you have gathered all the numbers, you can compare them side by side and, as Flynn says, let the math do the talking: “Numbers don’t lie. It is all just math.”
The bottom line
While deciding between buying or leasing can seem like a daunting project, following the steps outlined above can help take some of the burden off. Be sure to weigh the pros and cons of leasing versus buying to ensure you are choosing the right thing for you and your family.
“Buying or leasing a car is one of the bigger financial decisions you need to make but one that you are going to do repeatedly” Flynn said. “It makes sense to do it right.”
However, he also urged car consumers to stick to their budget: “The trick of the rich is don’t overbuy a vehicle. It’s something we can all learn from.”