Buying versus leasing a new car… what is the better choice from a financial perspective? This is a question many car shoppers wonder as they try to reconcile the car they want to drive with what they can afford to pay. From renting designer clothes to rent-to-buy home furnishings, people today are more comfortable than ever to lease, rent, or otherwise not own the items they use. Regardless of what is in fashion today, or what feels more financially comfortable in the short term, you can still view the financial implications of your decisions objectively.
For those of you who enjoy driving a new vehicle, it is valuable to understand the pros and cons of buying versus leasing a vehicle and how to assess which option is right for you based on your financial situation. As with any big money decision, make sure you know what you’re getting into and the total cost to you over the long-term.
Here is how to assess whether buying or leasing is the better move to get behind the wheel of your next new car.
Pros and Cons of Leasing a New Car
When you lease a car, you can easily bring it back to the dealership when your lease is up and walk away or in another newly leased vehicle after you settle up on any remaining fees. There is no haggling.
If you aren’t the type of person who wants to commit to a vehicle for years and years, leasing provides the low commitment option. The average lease term is three years.
Latest and Greatest Options
With a low commitment, three-year lease term, you can wind up driving the latest model car with all the new technology and premium features that you possibly wouldn’t have if you were to outright buy a vehicle.
Lower Upfront Costs
Leasing a vehicle costs lower initially because your monthly payments are less than if you were to buy the car outright and sometimes less than your monthly car payments if you finance. This is one of the most attractive reasons why people lease. When you buy a brand new car, you are paying for the depreciation of that vehicle. Keep in mind that while your lease payments may be less, you are essentially paying the depreciation of a new vehicle and covering the lessor’s cost to own the vehicle, including a finance charge and some amount of normal maintenance on the vehicle for the life of your lease.
Higher Cost in the Long-Term
While your monthly lease payments may be lower than a car loan in the beginning, a car loan will eventually get paid off and you’ll no longer have a monthly car payment. However, when you lease a vehicle, you will always have a monthly lease payment, making the cost of leasing significantly higher in the long run than a vehicle owner who goes years without car payments.
Since you don’t own a leased vehicle, it does come with some strings attached. Leased vehicles absolutely limit the amount of miles you can put on it. If you go over your mileage, it will cost you greatly – as much as 30 cents a mile extra. If you don’t use the mileage that was factored into your lease price, then you essentially pay more for the mileage you did use. Either way, it’s a no-win for you, the lessee. Additionally, your lease may restrict what you use the vehicle for, so you have to be judicious about the terms of your lease agreement.
Speaking of lease agreements… Believe it or not, lease agreements are incredibly complicated. You would think that leasing a car would be fairly straightforward, but there is a ton of fine print to be aware of! If you don’t know what to watch out for in your contract, you may even want your financial advisor or attorney to look it over for you so that you can ensure you’re not getting a bad deal.
You Don’t Own It
By not owning the vehicle, you can’t personalize it further than it comes when you drive it off the lot. The bottom line, it’s not yours. It still belongs to the lessor, and they are merely letting you borrow it at a cost.
Pros and Cons of Buying a Car
Now, I rarely consider a vehicle to be a huge asset to anyone. In all my years as a financial advisor, I have never once seen someone sell their car to free up cash to fund other financial goals. That being said, owning the vehicle gives you the freedom to do as you wish with it. You can give it to your grandchild if you want to. You can trade it in for another car whenever you want to. It is yours.
If you are someone who likes to personalize your vehicle, ownership is the way to go. From bumper stickers, to after-market spoilers or window tinting… you can personalize your vehicle however you want. No one is going to tell you “no” (besides maybe your spouse or kids)!
Owning your car comes with a cash value, however big or small. That is a nice way to provide a down payment toward your next vehicle purchase rather than having to save up the cash value separately. This only works if your car is paid off in full. If you still owe on your vehicle when you go to trade it in, you don’t have equity to trade. The vehicles we drive on a day-to-day basis never appreciate in value, so your car will never be worth more than it did when you purchased it.
Owning your car offers the greatest flexibility. You can hold on to it as long as you want, drive where you want to drive, use if for what you need to use it for (commuting, commercial, leisure), trade it in for an entirely different make and model vehicle, you name it.
If you need financing, it tends to be easier to understand than leasing a vehicle. Financing a car purchase is also more common than leasing (at least for now) and easier to secure than a lease. Leasing requires impeccable credit, whereas a car loan is more forgiving if you have a less than stellar credit score. There are also many financing options available to you, so you can shop around for the best interest rate before you even visit a dealership to buy a car. Want to avoid the financing department altogether? Save up the full cash value of the car you want to drive so you can outright buy your next vehicle. With planning and patience, buying a car outright can offer you negotiating leverage to secure the best price for the car you choose to purchase with no interest payments whatsoever.
There is no doubt about it, buying a new car is the option that has the highest initial outlay. The premium you pay when you opt for a new car is high, that’s why I often recommend buying it gently used so that you can own it during its lowest cost of ownership years. That said, if you are someone who holds on to her vehicles for a long time and your financial house is in order, then assuming this higher cost initially is fine if that’s how you want to spend your money. I tell my clients that their best bet is to look for Certified Pre-Owned vehicles. These vehicles are still fairly new, generally only have one owner, and you won’t pay a premium for premium features or the depreciation of a new car.
Depending on your state, you can wind up paying out your nose in sales tax for a new car. While most states tax you on the purchase price of your vehicle, there are some that tax you on the MSRP price of the vehicle even if you purchase it for less than the sticker price. California is one of those states that taxes you this way. And before you think you will just buy your vehicle out of state, California will get you with “use tax” when you register your vehicle through the DMV. Unless you purchase and drive your vehicle for more than 12 months before bringing it to California, you will still owe taxes on your vehicle most likely. If you owe use tax, it will be based upon the purchase price of the car, minus whatever sales tax you paid to another state.
Car purchases don’t have warranties for the lifetime of ownership. You will have a manufacturer’s warranty that generally expires somewhere around 36,000 miles or 3 years. You can then purchase an extended warranty that can cover your car beyond the manufacturer’s warranty. It is essentially a service agreement through the manufacturer or a third party. Whereas, a lease is covered for the duration of your lease term.
Should You Lease or Buy Your Next Car?
This is a personal choice, but as with anything that comes to your finances it’s good to understand your priorities, what you can afford, and the long-term impact of your financial decisions. If you need help understanding which option makes the most sense for your financial situation, this is where having a fiduciary financial advisor can offer a lot of value to this important everyday money choice.