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At a glance: Lease vs. buy
|Potential benefits of leasing||Potential benefits of buying|
Shopping for a new vehicle? Maybe your current ride has some wear and tear, or you’re interested in switching to a car with better gas mileage. If you’re wondering whether your best move is to lease or buy a car, it’s worth considering both options.
If you’re looking for the most cost-effective option over the long term, buying a used car and keeping it for a few years after you’ve paid it off is often the best choice. But what if you like having the newest technology or the most-up-to-date safety features? Leasing might give you the freedom to make the periodic upgrades you’re looking for without breaking the bank.
The truth is there’s no one-size-fits-all option when it comes to the age-old question of lease vs. buy. Still, identifying some key factors related to cost and your personal preferences can help you decide what’s right for you.
Let’s look at some of the important factors you should consider before talking to a dealer.
Lease vs. buy: 3 factors to consider
If your main goal is to get the lowest monthly payments, leasing could be your best option. Monthly lease payments are typically lower than loan payments, because they’re based on a car’s depreciation during the period you’re driving it, instead of its purchase price.
Lower monthly payments might help you balance your budget, but keep in mind that when you’re leasing, your monthly payments won’t end in ownership. That makes it likely you’ll lease again, which means more monthly lease payments. Buying a car, on the other hand, means knowing your monthly payments will eventually stop when you pay off the car.
When you lease a car, you may be required to get more coverage than you want. Leasing companies typically have their own standards for what qualifies as acceptable insurance and those standards may be higher than what you’d personally deem necessary.
Though insurance standards vary depending on the leasing company, they usually include comprehensive and collision coverage. It could be a good idea to spring for gap insurance, too, though some lease agreements include it at no additional cost (it’s a good idea to ask whether it’s included).
When choosing gap coverage, make sure to compare quotes from different insurance companies before deciding on a plan. This can help you find the most-cost-effective option for you and can be much cheaper than buying insurance through a dealer.
Thinking about financing your next car? Your required down payment could be around 10%–20% of the car’s total cost. The actual amount of cash you’d need to come up with can depend on several things though, including your credit scores. For example, someone with low credit scores who wants to finance a more expensive vehicle would likely have to come up with a larger down payment. A used car, or a model with less-expensive features, might be the key to a more budget-friendly down payment, particularly if your credit scores are lower.
Leasing may require a down payment too — especially if you’re interested in negotiating the lowest possible monthly payment. Personal finance expert Erica Sandberg encourages potential lessees not to overlook this part.
“Leasing can be a cost-effective alternative” to buying a car, she says, “but remember that you’re [potentially] putting down-payment money toward something you won’t own.”
While a bigger down payment might be wise if you’re buying a car, that doesn’t necessarily apply to leasing.
If you can secure solid lease terms, you’ll want to consider keeping your down payment as low as possible.
What actually goes into a lease?
In order to lease a car, you may be required to make a down payment. You may also be charged “drive-off fees” in order to begin your lease, which typically include registration fees and a security deposit.
The monthly payment on your lease will be based primarily on the difference between the car’s selling price and the value it is expected to have at the end of your lease term. The more the car is expected to depreciate, the higher your monthly payments could be.
In addition to paying for the car’s depreciation, your monthly payments will likely include interest, fees and taxes.
You may have some additional expenses to cover before returning the car, since you’ll be expected to fix any excessive wear and tear. That could include damages ranging from a tear in the upholstery to a scratch on the bumper, depending on the specifics of your lease agreement.
Are you prone to getting lots of bumps and dings? If you live in a crowded city or have a long commute, you may be at risk of putting more wear and tear on your car.
The cost of repairs can hit both car buyers and lessees. Cars are typically leased for three years, so if you lease a brand-new vehicle it will likely be under warranty for the duration of your lease. But you may still be required to replace worn tires, scratched windows and other blemishes when you return the car.
As cars get older, the cost of repairs can rise significantly. If you decide to buy, you’ll want to budget for regular maintenance and upkeep.
On the plus side, once your car is paid off, the cash that previously went to your monthly payment can be set aside to help cover maintenance costs.
If you’re a car owner, the more miles you drive, the faster your vehicle depreciates. In fact, logging a ton of miles on your car is one of the quickest ways to reduce its value.
But putting lots of miles on your car can be an even bigger problem if you want to lease. Auto leases usually come with mileage limits, typically set around 12,000 miles per year for a standard lease. Going over that number could mean being penalized at a rate of about 15 cents a mile.
For many drivers, the idea of being locked into one specific car over a long time period is … less than ideal. If that sounds like you, leasing might be your best bet.
“Leasing can be great for people who want to drive something swanky or new every few years, or for people who need a nice car as part of their job,” says Sandberg.
But leases may not be as flexible as you think. If you get tired of your car or your needs change, you may want to think twice about turning the car in before the lease ends. If you break your lease early, you could be on the hook to pay some steep penalties. You could even be required to cover all of the remaining lease payments and pay additional penalties on top of any other fees. Ouch.
As a car buyer, you have more freedom to get rid of your vehicle. While it’s not ideal to sell your car at certain times, like when you’re underwater on your auto loan, you can still technically sell whenever you’d like without incurring fees — though you may still be responsible for any remaining balance owed on your loan.
That’s why knowing how often you’ll want a new car is a key factor in the “lease vs. buy” discussion. Not sure how frequently you plan to switch vehicles? It might be helpful to think about your previous few cars and how frequently you’ve traded or sold them in the past.
As with any major financial decision, it’s important to do your homework before deciding to lease or buy a car. Shopping for good rates and comparing numbers is always a good idea. Here are some important figures and costs to look at before making your decision.
- Monthly auto payment
- Down payment
- Annual mileage
The best decision for you ultimately depends on your preferences, your budget, and how mindful you want to be of any expenses you might incur down the road.