Leasing Vs. Buying a New Car: Which is Right for You?

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When the time comes to consider a new vehicle, there are two major options: leasing or buying the vehicle. Most people understand the process of buying a car, but they may not understand the finer points of leasing.

Buying a car means that at some point if you manage all the payments, you will own that vehicle and have full control over its destiny. Leasing, on the other hand, is more akin to renting a ride for a period at a lower cost.

Either option provides its own series of advantages and disadvantages which can serve as important factors as to whether buying or leasing a car is the right choice for you.

The Finer Points of Buying vs. Leasing

There are, naturally, a lot of differences inherent in the process of buying a new car versus renting one. These variations begin right from the start, with the payment terms.

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Buying

When buying a car, the general process involves getting a loan that covers the full amount of the vehicle. Once that has been done, the purchaser has paid for the car, but is not the owner because the loan itself remains unpaid.

The payment amount varies depending on a lot of factors (such as the price of the car itself, the amount of down payment, and the length of the loan), but ultimately you will be paying off the value of the car (the "principal") plus interest payments on the loan in monthly installments.

The longer the period of the loan, the more interest you will ultimately pay during this financing journey. However, once you have paid it off, the vehicle becomes an asset - yours to do with as you like. You can choose to trade or sell the vehicle as you want, although a car's value depreciates considerably over time.

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Leasing

When you are leasing a car, you are essentially renting the automobile only for its value during the length of the contract, which is usually three years. Because you are not paying any interest on a loan, the monthly payment is often cheaper, making it a more affordable short-term option.

However, at the end of the contract period, you will be expected to return the car to the lot, pay any additional fees based on a variety of factors (such as whether the condition of the car fits their definition of having "normal wear and tear"), then walk away.

The downside of this is that you have no equity in that car and have gained nothing during the lease other than the temporary use of the ride. However, if you found the vehicle enjoyable and want to purchase it, you can usually decide in that regard. Otherwise, you are free to consider a lease on another vehicle, starting the process anew.

Leasing: Pros and Cons

To fully understand whether leasing is the option for you, it's a good idea to look a little deeper than the basics to discover what aspects of the process make it ideal, and which could cause you to reconsider.

Pros

• Initial Costs - While there are many of the same fees up-front as with buying, you will not have to make a down payment. This is great when you do not have a considerable nest egg already established.

• Monthly Payments - These payments are generally lower because you are not paying interest on a loan, just the car's value throughout the life of the contract. This can allow you to drive a new ride that you may not be able to afford through the purchasing process.

• Closing - When the contract ends, you resolve any residual fees and walk away free of any obligation for that vehicle.

• Flexibility - You can decide to purchase the car after the resolution of the contract, begin a lease on a new vehicle, buy a used car, or any other option that suits your fancy.

• New Cars Every Few Years - One of the greatest advantages to leasing is that you can perpetually ride the hottest new cars, swapping them out with a new lease every three years or so.

• Enjoy the Newest Features - Since the lease period takes advantage of the early life of the car, that means you are far less likely to have problems with it and can enjoy all the bells and whistles that come with each new vehicle.

Cons

• No Equity - Since you are not purchasing the vehicle, you have no ownership over that vehicle, meaning that there is no investment that can pay off down the line.

• Mileage Limitations - Leasing companies want to ensure the vehicle is returned to them in the best condition possible, so they generally impose mileage limitations often in an average range of 11,000 dollars a year. If you experience overage, you will have to pay a fee that covers each mile beyond the agreed amount. While this can be as little as $0.20 a mile, it can add up quickly.

• Normal Wear and Tear - For the same reason, if the company assesses your vehicle and decides that the damage exceeds their definition of "normal wear and tear," they will charge you accordingly. This also means you are not allowed to customize the vehicle as they want it back in as close a condition to how they leased it as possible.

• Ending the Lease Early - Attempting to terminate the contract before it reaches its natural resolution requires a rather significant fee, the cost of the rest of the contract. Due to this, there's no real value to ending the contract early as it will ultimately result in paying the full amount of the lease yet surrendering the usage of the car early.

Buying: Pros and Cons

Likewise, buying a vehicle has both advantages and disadvantages to take into consideration:

Pros

• Ownership - When the vehicle is paid off, you own it and are allowed to do with it as you wish, including selling it or trading it in for a new vehicle. However, the longer you make use of the vehicle afterward, the greater the value of the purchase, as you do not have to make any more payments.

• Greater Control - Not only can you customize and drive the vehicle as much as you wish, but you can also even sell the vehicle during the course of the loan period, using the earnings to pay off the loan and pocketing any residuals (if there are any).

• Longevity - The car will be yours for as long as you like, meaning that you will not have to go right out and buy a new one when the loan is paid in full. If properly maintained, the vehicle can last decades, saving you an incredible amount of money since you are no longer making monthly payments.

Cons

• Initial Costs - You are often required to make a significant down payment right at the beginning. The less money you put down upfront, the greater the monthly payment will be, resulting in higher interest costs as well.
  

• Greater Monthly Payments - As you are paying off the principal plus interest, the monthly payments can be steep. This can be mitigated somewhat by a large down payment and extended loan periods, but the fact is - this is going to be a significant expense.

• Higher Maintenance Cost - Since you will likely have the vehicle for an extended period of time, you are going to endure more maintenance costs and repair fees as the vehicle ages.

• Depreciation - The value of the car will also drop sharply in the first few years and steadily decrease over the life of the vehicle. Even though that equity will be yours, if there is a serious accident or similar situation, insurance may only cover the value of the vehicle, which may not be enough to facilitate complete repairs.
  
  In fact, in some situations, this may result in the end of the life of the vehicle, placing you in the position where you need to find a new ride earlier than you anticipated.

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The Downside of Lengthy Car Loans

One unfortunate side effect of purchasing a vehicle is that it is expensive. That often means a significant loan that can last six years or longer, depending on the deal you work out with the lender.

The shorter the loan, the higher the monthly payment. However, the longer the loan, the greater you ultimately spend for the car in interest. As the loan nears its end, you are often paying considerably more than the car is even worth, which is what makes it more likely that insurance may not provide enough to cover the cost of the vehicle.

When that happens, you may be able to cover the difference in an agreement for a loan to cover a new replacement vehicle, but in that case, you're paying even more than you would for the new car itself because bundled within that agreement, you are still paying the difference for the totaled vehicle.

This is just one of many risks you face when purchasing a new vehicle.

This is one reason why some people opt to lease vehicles instead. The monthly payment is far more palatable and there's the excitement of always driving a new vehicle, as every three years or so, it can be swapped for a new one.

Despite the lease-imposed limitations, it provides a peace of mind that the vehicle is going to perform as intended while granting access to the newest vehicle technology and perpetual "new car" smell.

The True Comparison between Car Loans and Leases

Unfortunately, it is very difficult to pinpoint exactly how much of a difference there is between payments for loans and leases during a given time frame because there are many factors that determine what the monthly payment will be.

The down payment on a loan and its total value can significantly affect monthly loans, as can the current interest rate, and the life of the loan. Likewise, the type of vehicle and whether the renter can avoid incurring additional fees can factor into the cost of a lease.

Ultimately, if you participate in back-to-back leases throughout the same period of loan repayment for a new car, you are going to spend considerably more money - in the thousands of dollars range. Furthermore, the longer that the owned automobile is in use after the debt is fully paid adds exponential value to the deal.

However, you will be stuck with the same vehicle, which will become decreasingly reliable as it ages, and may face premature destruction that can result in the need to purchase a new vehicle.

While perpetually leasing a vehicle means that you will never enjoy an escape from monthly payments, those payments will be lower, and you will get to enjoy a variety of new and exciting vehicles for as long as you wish to continue leasing.

Also, don't assume that because you are leasing a vehicle that the advertised monthly fee is non-negotiable. Often the rate is set based on the manufacturer's suggested price, but much like with buying new vehicles, you can often talk the dealer down to provide a more favorable rate.

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Basic Differences between Loans and Leases

Remember that loans have different lifespans that determine how much a monthly payment will be and how much interest you will pay. Paying a significant down payment can have a drastic effect on how high the monthly payment will be.

Interest rates vary, and the shorter the life of the loan, the less you will pay. On the other hand, that will generate a significantly higher monthly payment as you are paying the premium off in a shorter amount of time.

With a lease, you are negotiating a shorter contract which generally means a lower monthly payment. You are not expected to make a down payment, nor pay interest - just continue to pay the agreed amount until that contract ends.

Remember that in both cases, you can negotiate for better terms, but that in the case of a lease on a new car, you will not earn any equity in the vehicle itself as it will function as a rental.

The Bottom Line - Should You Buy or Lease?

Deciding which is best for you ultimately comes down to your end goal. If you want to save money in the long run, then your best bet is to take out a loan for a new vehicle. It will result in higher payments and more money upfront, but you will own the vehicle and once the payments are made, every year of use beyond that point is nothing but the money saved (beyond maintenance costs).

If you're more interested in a more reasonable monthly payment and the opportunity to perpetually drive the newest cars during the prime years of their lives, then leasing is the way to go. If you can meet the terms, there are fewer risks involved, and you can easily walk away when a lease ends if you want.