Car shopping can be stressful. Between contracts, loans, maintenance, fees, and total value, it can be hard to know if you’re getting a good deal on your new ride. There are many things to consider when looking for a new car. Perhaps the biggest is whether or not you’re going to buy or lease?
Which option is right for you? It starts with considering your financial plan, budget, cash flow, credit score, occupation, and personal preferences, then weighing the pros and cons of each to help you decide which path is best for you.
Breaking Down the Lease
There are many factors to consider when leasing, including monthly payments, total car expenses, overall use, and value. Let’s dive in.
Leasing cars is nothing new. Dealerships have always marketed leases as a great way to drive a nice car for a fraction of the price. Most leases are from 36 to 48 months; at term’s end, you can either finance to purchase the car at a predetermined price or turn it in for another vehicle under new lease terms.
This is a desirable arrangement if you’re interested in driving the latest cars with the best new features in safety and technology. Leasing also allows you to drive vehicles you might not otherwise be able to buy.
When comparing total monthly expenses, leasing is almost always the more cost-effective option. Lease terms often require lower down payments, especially for those with strong credit, and smaller monthly payments.
Why are monthly payments so much lower in a lease? The price of the lease takes into account several elements: the sale price, lease length, total mileage, taxes and fees, and most importantly the residual value of the car. The residual value considers a car’s depreciation and value at the end of the lease term.
Another leasing benefit is how it eliminates a common pain point for car owners: maintenance. Under the lease contract, most regular maintenance could be covered through warranty. But be sure you know exactly what is and isn’t covered before you drive off the lot.
Did you know that under the right circumstances your lease payments can be a tax write-off? The IRS allows you to deduct the depreciation and financing costs of your monthly payments. Check with your tax professional to ensure your lease allows for this deduction.
Leasing is often lauded for lower payments and a stress-free experience. But before you get swayed by fancy labels, shiny exteriors, and low monthly payments, consider this: with a lease you’ll always need to budget for car expenses.
Unlike financing the purchase of a car, whose payments will one day come to an end, your lease doesn’t work that way. With leasing, you will always need to have a car payment in your monthly budget, making it a more expensive option in the long-term.
It’s also important to remember your monthly payments won’t result in you owning anything. This makes leasing similar to renting — you don’t have anything to show for all the money you’re spending.
Leasing a car also comes with many “hidden” expenses. First, the dealership will limit you with a set amount of miles you can drive over the course of your lease — usually 12,000 to 15,000 per year. So if you’re constantly shuttling your kids to extracurricular activities across the state, or if your family is big on road trips, or if you have a long commute, these mileage limits could be a roadblock for you.
You can purchase additional miles up front, usually at inflated cost. But if you exceed your miles, you’ll owe the dealer a fee for every mile over the limit — some as high as 20 cents per mile — which could be a big shock when the lease is over.
With a lease, you’ll also be on the hook for acquisition fees, security deposit, early termination fees, and disposition fees (the cost of cleaning and selling the car at the end of the lease).
Another fee to watch out for is “average” wear and tear charges when you turn the car in. Under the contract, you will generally be covered for any normal amount of wear and tear over the course of your lease. But that can be quite subjective and could end up costing you a lot if the car is in poorer shape than you got it.
With a lease, you also can’t customize the car like if you had bought it. You must return the car in the same condition you got it, which could mean added expenses in removing any upgrades or style choices you made along the way.
Buying a Car
Buying a car is a big purchase that shouldn’t be taken lightly. There are many reasons for buying instead of leasing, but there are also important considerations to think about before you sign on the dotted line. Let’s explore a few.
Advantages of Buying
The top advantage of buying a car is simple: ownership. When you buy a car, you will eventually own it, giving you the freedom to keep it as long as you want — and eventually sell it or trade it in, which can help offset the price of an eventual future vehicle.
From a cost perspective, purchasing a low-price car in cash is the best scenario. That way, you aren’t responsible for ongoing monthly loan payments, just regular upkeep like insurance and routine maintenance. But buying a car in cash isn’t always feasible.
Car loans range from 4 to 6 years and have relatively low interest rates for those with good credit. The average interest rate for auto loans in 2020 is 5.27% for a 60-month loan, but that number can fluctuate greatly depending on credit score, length of the loan, vehicle type, and more.
For those with credit scores well into the 750s or higher, interest rates can fall to 3%; those with low credit scores can see rates of 10% or higher. As you can see, your credit score is a sign of how expensive an auto loan will be. The better credit you have, the more attractive buying becomes.
Owning your car brings freedom that leases don’t offer, like customizations and driving as far as the car will take you. You are in control and aren’t tied to a contract limiting these freedoms, letting you use the car in the way you prefer.
Disadvantages of Buying
The main disadvantages of purchasing a car are up front costs and higher monthly expenses. A loan will cost you more in the short-term, plus you’ll need good credit to get fair and reasonable terms.
Owning a car also means you’re on the hook for regular and unexpected maintenance costs like new tires, fluid, engine, brakes, and more. Depending on the type of car you buy, your level of maintenance costs will differ. Be sure to do your research and find a car that will be resilient and roadworthy for the long haul.
A car also depreciates in value the second you drive it off the lot. While this is also true for a lease, buying a car means you are funneling money into an asset that is constantly losing value. This can make resale tougher. You’ll bear the entire responsibility for selling or trading in your car which can be stressful.
So Which Option is Right For You?
When looking for a new car, weigh all of your options before you commit. While leasing might be more attractive in the short-term, it’s more expensive in the long-term. Between constant monthly payments, mileage limits, and other contractual obligations, leasing isn’t as hands-off as first seems.
Leasing is a good idea, however, if you’re constantly rotating through vehicles every 3 to 5 years, or if you write off monthly expenses for your business needs.
Buying a car is more than likely going to be your best bet. Even if you have to finance the purchase over several years, the right vehicle could last you 10 years (or more) and become an asset you own, keeping you from an endless cycle of monthly payments later on.
As you decide between buying or leasing a car, remember to keep these considerations in mind:
- Average use of the car
- Monthly budget
- Cash flow
- Credit score
- Total costs
- Environmental impact (gas hybrid vs. electric)
- Your personal preferences
With thoughtfulness, you will find the best decision for you and your wallet. Our Abacus team loves helping clients align their values with their money, and that includes discussing the pros and cons of buying or leasing a car. Ready to learn more? Set up a call today.