“Leasing vs. Buying Your Next Car”
With the used and new car market being an interesting space right now, I thought this article from Eric Roberge at “Beyond Your Hammock” did a great job breaking down the age-old question of leasing vs. buying your next car.
If you need to buy a new car, you might wonder about the financially optimal way to go: is leasing vs buying a new car better? In the past, the question of leasing vs buying a new car might have had a clearer answer.
Buying outright with cash and then owning that car for 10 or more years was likely going to be the best financial move. You’d save on the interest rate of a loan, avoid debt on a depreciating asset, and not need to upgrade or switch vehicles in just a few years. But today, with a crazy car market and skyrocketing prices, it’s worth reconsidering the question.
There are pros and cons to leasing vs. buying a new car no matter who you are — but ultimately, what’s best for you depends on your financial situation, the purpose of the vehicle, and your priorities.
So let’s break down the advantages and disadvantages of leasing agreements versus traditional auto loans (or simply buying upfront with cash) to help you decide which option is best for you.
Does Leasing a Car Ever Make Sense?
In some ways, leasing a car can feel similar to taking out a traditional car loan. You’ll still make a monthly payment, and in many cases, you may have to make a down payment as well. However, in the case of a lease, you’re essentially paying to “rent” the vehicle rather than own it — and there are plenty of circumstances in which that actually makes more sense than making the large upfront financial commitment of ownership.
The short-term lease contract is good for folks who strongly prefer to drive newer vehicles. If that’s extremely important to you, leasing could actually save you money over time thanks to:
Lower Payments: Compared to buying a new car, the monthly payments on a lease agreement tend to be lower. In addition to paying less for a car monthly, you can also typically expect a lower down payment to get started with a lease.
Ease of Transference: When your contract is up, getting rid of your vehicle is often as simple as dropping it back off at the dealer. You don’t have to worry about selling your vehicle or trading it in when you’re ready for a new one.
Complimentary Maintenance: Many lease agreements offer complimentary oil changes and routine maintenance as part of the contract.
And if you fall in love with your leased vehicle and want to hang on to it? You may have the option of buying the car at the end of your lease. If you can’t purchase the vehicle outright, you may be able to apply for what’s known as a lease buyout loan.
When Leasing Vs. Buying New means Losing Money
Leasing is often a good option for people who highly prioritize convenience, the ability to maintain a new car, or flexibility (since there’s no committment of ownership outside of what you’re responsible for as per the lease agreement). But if you only care about the numbers, this is where leasing vs buying a new car could be seen as the “wrong” decision.
Here are a few potential pitfalls to consider before you lease:
No Equity: When your agreement ends, you’ll have made a lot of monthly payments… but you’ll have no asset to sell or trade in. And if you want out early? Exiting a lease early may result in expensive penalties.
More Expensive Over Time: Lower monthly lease payments can seem like a great idea in the short term, and they can be if it’s a short-term decision. But if you constantly lease new cars, you may end up paying far more over time than simply buying one car and sticking with it (and again, you’ll have no asset, depreciating or otherwise, to your name at the end of all those leases).
Other Limitations: Typically, lease agreements come with mileage restrictions. The terms of your lease will require you to keep your driving within a certain mileage limit. If you go over the limit, you’ll have to pay additional fees, which can range between 10-25 cents per mile. Depending on your driving habits, these fees can add up quickly. Plus, anything considered in “excess” of normal wear-and-tear on the vehicle could put you on the hook for additional costs of repair for a car you’ll no longer be driving once your lease is up.
Another potential pitfall is the fact that it’s hard to know at the outset what will be best in terms of “is this lease a good deal” because we can’t necessarily predict the future.
We don’t know what car values will be when the lease is up, especially given how strange the market is right now, so that makes it difficult to fully evaluate whether or not a specific lease agreement’s terms are favorable.
Where Ownership Gets the Advantage
When you buy a car, you still have to make a down payment and monthly payments (or pony up a considerable chunk of cash to drive off the lot if you’re not financing).
But it’s also your car. That provides a list of pros well worth considering, including:
No Car Payments (or at Least an End to Them): If you buy with cash upfront, you don’t owe interest or have additional debt and your car is 100% your own. Financing can also get you here in 5 years, which is financially better than leasing over and over again.
Equity: When it’s time for the next vehicle, you’ll likely have an asset you can sell or trade in (although it will likely have depreciated in value from the time you purchased it).
No Restrictions: It’s your vehicle, and you can rack up all the miles you want without having to worry about additional charges. You also won’t have to keep an eye out for what a dealer might consider excessive wear and tear. Not that most people buy a new car with plans of trashing it… but have you ever heard of toddlers?
With buying, advantages are straightforward: it’s your car and it can cost you less in the long run. If you’re the type of person who drives a car until the wheels fall off, buying is typically the financially best way to go.
Just remember to consider the costs of ownership beyond the sticker price. You need to think about maintenance, especially if you’re eyeing a luxury car that you can’t just take to any mechanic for repairs or upkeep.
And while ownership means you get the advantage of liquidating the asset, you also have to, you know, go through the process of liquidating the asset, either by sale or trade. You won’t have the same ability to just “walk away” as you do with a lease.
With equity comes responsibility, so when it comes time to sell or trade in your vehicle, you’ll have to put in the extra effort to research pricing, make any necessary repairs, and find the right buyer (or make a good deal with a dealership if you’re doing a trade-in).
A new car can be a substantial financial commitment regardless of how you acquire it. And as with any large purchase, it’s best to think through all the angles before making a decision.
Take your time to research options, think through the questions listed here, and even talk through the choice with a trusted professional like your financial planner. Doing so can help you make an informed choice that fits within the context of your overall financial plan and goals.