Should I Lease or Buy My Next Car?
December 21, 2021When it comes to car shopping, it can be very stressful deciding whether to lease or buy a car. As someone who recently purchased a new car, the whole process can be nerve-wracking if you do not engage in due diligence with your research. Car shoppers are constantly bombarded with different dealership incentives pressuring you to make a quick decision while on the lot. The truth, there’s not a simple answer when it comes down to buying vs leasing. The decision depends on both your personal and financial situation. Below are some points to ponder as you consider whether to buy or lease your next car.
Advantages of leasing
Lower monthly payments: One of the main advantages for leasing a car are the low monthly payments. In a lease term, the lessee only pays for the car’s deprecation plus interest. For a traditional car loan, your monthly payments are determined by the amount of the loan and the amount of interest you are required to pay over the course of the loan. If you are budgeting for the lowest monthly costs, then leasing is a great option. Below, is a hypothetical example between the monthly payments of leasing or buying a car. In this example, your lease payment would be $262.08 compared with a $372.93 loan payment. This is based on a price of $20,000 and a 36-month lease vs. a 60-month loan. Details of your cost of leasing vs buying can be seen in the chart below.1
Buy |
|
|---|---|
| Price | $20,000.00 |
| Interest rate | 4% |
| Down payment | $1000.00 |
| Other fees buy | $0.00 |
| Rate of depreciation | 20% |
| Sales tax | $1,250.00 |
| Loan amount | $20,250.00 |
| Loan payment | $372.93 |
Lease |
|
|---|---|
| Price | $20,000.00 |
| Interest rate | 4% |
| Down payment | $1000.00 |
| Other fees lease | $500.00 |
| Residual percent | 60% |
| Security deposit | $500.00 |
| X | X |
| Loan payment | $262.08 |
New car every few years: Another perk of leasing is that you can drive a brand-new car every couple of years. Car leases typically range between 24 and 36 months. After the lease term ends, you can renew a separate lease with a brand-new car. The new car may come with a warranty coverage for repairs, thus lowering the potential expenses due to out-of-pocket repairs.
Favorable manufacture incentives and lease specials: Automakers often offer package incentives and rebates to promote car leases. These include cash rebates, subsidized interest rates, or subsidized residual value. These incentives are based on an inflated residual value, meaning that the estimated value of the car at the end of the lease is unrealistically high.2
Disadvantages of leasing
No ownership: While the lower monthly payments can be appealing to car shoppers, one important item to keep in mind is that lease payments will not end in ownership. Unless you select a buyout option at the end of the lease, you will continue making monthly lease payments without building equity. In layman’s terms, you will always make payments toward an asset that you will not own.
Lower flexibility on miles: Since your monthly payments are based on the car’s deprecation plus interest, a lease always comes with mileage limits. The reasoning is that a car dealer does not want your car to depreciate faster than the expected residual value at the end of the lease. Annual mileage limits range from 10,000 to 15,000 miles a year, with the majority coming in with 12,000 miles. Most leasing companies charge .15-.20 cents per mile over the amount allowed in the contract, meaning that you are liable to pay an extra $150-200 every thousand miles.
Require comprehensive and collision insurance: Leasing companies normally require the lessee to carry comprehensive and collision coverage on their auto policy. Lessors also require lessees to carry higher bodily injury liability limits. These requirements mean that leasing can cost more to insure than buying a car.3
Advantages of Buying
Monthly payments end with ownership: While the initial cost of buying a car is higher than leasing, the advantage is that your monthly payments end with ownership. Once a car is paid off, you could set aside cash that was previously used for monthly payments to cover future maintenance costs.
No mileage limits: Unlike a car lease, you are not restricted to an annual mileage limit when you buy a car. This gives the buyer more flexibility to choose how they want to utilize their car. If you are someone who puts more than 15,000 miles a year on a car, then buying would be the suitable option.
No wear and tear fee: While repairs and maintenance are normally covered in car leases, dealerships can charge extra fees for excessive wear and tear. While car buyers are on their own to cover maintenance costs, you will never worry about paying an extra fee for above normal wear and tear.
Disadvantages of Buying
Higher monthly payments: Unlike lease payments where monthly payments are based on the car’s expected depreciation plus interest, a traditional loan payment are determined through the loan amount, the interest rate, and the loan term. This makes monthly car payments higher in the short term compared to monthly lease payments.
Higher down payment: To lower your monthly payments and get the best loan rate, car buyers will need to put down a higher deposit. A general rule of thumb: aim to cover at least 20% of the purchase price of the car with a down payment. This can be unattractive to car shoppers who have limited cash reserves.
Depreciation: The intangible cost for owning a car is deprecation. The moment you drive the car off the lot, car buyers are susceptible to fluctuations in depreciation and resale value. According to industry experts, the value of a car drops by 20% in the first year of ownership, while losing on average around 15% of its value each year.4 Depreciation and resale value are influenced by the make, model, year, and type of car.
What’s the best option for me?
In the end, one option is not inherently better than the other, it all comes down to personal preference and your financial resources. If you value paying lower monthly payments and you are not making cross country road trips each year, then leasing may be the best option for you. On the flip side, if you value ownership in your assets and you tend to rack up thousands of miles on the road, then buying may be the better option. A key aspect of your decision, having confidence and taking comfort in the research you’ve done when you walk onto the car lot.
1 https://www.bankrate.com/calculators/auto/lease-buy-car.aspx
2https://www.edmunds.com/car-incentives/
3https://www.progressive.com/answers/car-lease-insurance/
4https://www.carfax.com/blog/car-depreciation
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