Locking in a lower interest rate on your car loan could give your budget more wiggle room. An auto loan can take a big bite out of your monthly budget. But if your interest rate is too high, your monthly car payment might be significantly larger than it needs to be. Drivers able to lock…
The decision to buy or lease a car isn’t easy.
Getting a new car is a big decision that can affect your life and finances long term. Choosing whether to buy a car or lease one isn’t always easy to figure out. Both choices have their merits. It often comes down to budget, goals, and personal preferences.
If you’ve always dreamed of owning a brand new car, you may think buying a car is the right call, but it’s important to consider every aspect before making that call. Let’s take a look at the differences between leasing and buying a vehicle, the pros and cons of each, and other factors to consider in your decision.
Buying vs. Leasing a Car
When you find a car you like, typically, you can choose to lease or buy it. Either way, you’ll end up driving the same car. But there are several differences between both options.
First, when you buy a new car, it’s your car. You own it. You may owe a significant amount of money on your vehicle, depending on how you financed it, but it’s still yours. When you lease a car, it belongs to the car dealership. Essentially, you are renting the car for a set amount of time. You can choose to own it eventually if you would like, but it’s not yours when you initially drive off the car lot.
Buying a car usually includes paying a down payment upfront. Many people use trade-in vehicles as a down payment. Many leases don’t require down payments. That doesn’t mean that leases won’t cost you any money initially. While monthly lease payments are typically lower than when buying a car, leases also come with extra charges like:
- Security deposit
- First month’s payment
- Acquisition fee
- Documentation fee
For those who choose to buy a car, when it’s paid off, you still own a car. It still holds resale value that can be used as equity if you trade it in towards another new car. You can choose to keep it and not have a car loan payment. At the end of a lease, typically between two and four years, you must bring it back to the dealership.
How Does The Car Buying Process Work?
Hopefully, you spent time researching vehicles and their costs to find a car that fits your budget. If you choose to finance your car purchase, you can either seek pre-approval from a lender or choose to let the dealer obtain financing for you. Both options require completing a credit application. Having good credit can lead to better interest rates and terms.
Most dealers require a down payment on the purchase of a new car. If you have a trade-in vehicle, you can put that down either as a down payment or in addition to one, lowering the total cost of the car.
The total purchase price is determined by the base price of the vehicle, sales tax and fees, and any add-ons, like vehicle service contracts or agreements, extended warranties, or GAP waivers or insurance. Your car loan terms play a part in determining monthly payments. Longer terms mean lower monthly payments. Shorter terms make your monthly car payment rise.
How Do Car Leases Work?
Auto leases also involve a credit check, but the requirements are typically less because you’re only financing the car’s expected depreciation during the lease period, not the entire value of the vehicle. Monthly lease payments are lower because of this, as well. Besides the depreciated value, you also pay rental fees and other various fees and taxes with a leased car.
Restrictions exist with a vehicle lease that you don’t see if you purchase a car. Included in the lease contract is a mileage limit, typically 15,000 miles or less annually. You are subject to a per-mile charge for the number of miles you’re over this limit.
Similar to renting an apartment, leasing a car has stiff penalties for damage beyond reasonable wear and tear. There are restrictions on customization you make to the car as well. Unfortunately, you’re at the mercy of someone else’s standards when you bring your leased vehicle back at the end of the lease period.
As mentioned, a leased car is not yours. You have to return it at the end of the lease period for evaluation. From there, you have a few choices of what to do next.
Options When the Car Lease Is Over
You’ve returned your car lease to the dealership. Now what? You have three choices:
- Walk away: Since it’s not your vehicle, and you’ve met the lease requirements, you can choose to walk away without a vehicle. You may need to pay some “end of lease” fees and charges, depending on your initial agreement.
- Lease or buy another car: If you like the idea of always driving new vehicles, you can lease a new car. Another option is to try your hand at buying a car this time around.
- Lease buyout: Another option is to do a lease buyout, which means buying the car you already leased. If you found a vehicle you love to drive, and its value has held up well, this could be the right decision. To move forward, you set up financing based on the car’s residual value.
Pros and Cons of Buying a Car
There are positives and negatives to buying a new car. Here’s a quick look at the pros and cons of buying a car.
Pros of Buying a Car
Cons of Buying a Car
Pros and Cons of Leasing a Car
Car leasing has its perks and drawbacks too. Here’s a list of pros and cons for leasing a vehicle.
Pros of Leasing a Car
Cons of Leasing a Car
When Does It Make Sense to Buy a Car?
Buying a car is a good idea if you like owning something. Owning a car gives you an asset, even if the value depreciates over time. Eventually, you’ll pay off the car and have no monthly car payment. At that point, you can choose to drive it as long as it lasts or sell it at any point for its value.
Another time it makes sense to buy a car is if you plan to move any time soon. Some leases have restrictions that don’t allow you to move it to another state.
Buying a car has upfront costs, like a down payment, but the cost is usually less than auto leasing in the long run, especially if you plan to keep it long term. You can always take out an auto refinance loan to lower monthly payments later.
If you tend to put tons of miles on your vehicles, buy a car instead of leasing. For anyone who spends much time driving, buying a car eliminates any chance of going over a leased vehicle’s mileage limits.
It also makes sense to buy a car if you’re looking for a used car. By purchasing a used car, you avoid most of the depreciation that occurs on the front end of a vehicle’s life. It also saves money on car insurance rates.
When Does It Make Sense to Lease a Car?
There are benefits of leasing a car. First, if you like low monthly payments, leasing a car is the way to go. Maybe you want to buy a car, but don’t have money for a down payment or higher monthly payments. You can lease a vehicle with lower payments and save up to buy a car when the lease period ends.
Some people love the idea of getting a new car to drive every few years. If that’s you, then leasing is the way to go. You still get that new car smell, and you won’t pine for a new car as much by leasing cars. Leasing also allows you to drive luxury cars at a lower price than buying one.
Another time to consider leasing a vehicle is when dealers offer deals on leases. Sometimes getting a good deal is too hard to pass up, especially if you can negotiate lower payments or bypass some of the typical fees associated with leases.
If you only have a temporary need for a car, leases make more sense. While having a car seems like a regular thing, it’s not for everybody. Leasing also is a good idea if you use your car for business purposes. There are more tax deductions available for leases.
Tips for Buying or Leasing a Car
Whether you plan to lease or buy, it’s essential to be smart as you approach your vehicle search. Here are some tips to follow to help you find your next car.
- Know your credit score: Check your credit report before applying for any financing. Credit scores are a significant factor in determining what kind of auto loan you receive and your interest rate. You can check your credit score for free at annualcreditreport.com.
- Get prequalified: If buying a car, get prequalified for financing before heading to the dealer. This puts you in control of who you finance through instead of relying on dealer-arranged financing. Check with banks or credit unions for low rates.
- Set a budget: It’s important to know how much you can afford and want to spend on a new or leased vehicle. Once you have a budget, you can look around to see what kind of vehicles fit and which ones cost too much.
- Shop Around: Don’t decide after the first deal you find. Shop around online and in-person at dealerships to find the right vehicle and price at the best deal. Use this Consumer Financial Protection Bureau auto loan shopping sheet when visiting dealers to ensure you get the best loan.
- Negotiate: Don’t be afraid to negotiate the vehicle or lease price. Car dealerships usually have some wiggle room in their profit margins. Be willing to walk away if you don’t get the deal you want. If you have a trade-in vehicle, negotiate it separately after negotiating the vehicle price.
Which Option Is Best for You?
There’s not a one-size-fits-all answer to which option is better. Each person is unique, and most of the decision lies on your own personal preferences, life goals, and the budget you’re working with at the time.
Buying a car is a smarter long term investment. If it fits within your budget, owning a car gives you flexibility in the future, when it’s paid off.
Take your time to research car purchase and leasing options to familiarize yourself with what’s available. Look for deals either way and stick to your guns if you prefer buying or leasing.