Buying or Leasing a Car

  • March 1, 2017
  • By: Greenpath Financial Wellness

Deciding whether you will be buying or leasing a car is a very important decision that can have a long-term impact on your budget. It’s important that you don’t end up with a car that you cannot afford down the road. Let’s take a look at each option in more detail.

Leasing A Car

The concept behind leasing is that you are basically renting the vehicle for 2-3 years. Unlike buying, your monthly payment is not determined by the full purchase cost of the vehicle.  It’s nice to have that new car feeling every few years, isn’t it? After a few years, it can be so convenient to just turn the car back in after it starts to age a little. Or, if it’s the perfect car, you may decide to keep it and continue to make the payments.

Leasing generally results in lower maintenance and repair costs, and you are not investing in something that is depreciating in value. On top of all that, your down payment and monthly payment will probably be less than if you decide to buy the car. However, leasing comes with mileage restrictions, “wear and tear” policies, and the fact that you won’t have a tangible asset once your payments end. For some, leasing is a viable option.

Buying A Car

It’s also nice to actually own what you’re driving and know that one day you will have it paid off. If your car lasts long enough, your budget will thank you because you will no longer have a car payment every month.

But wait — assuming that you will be financing your vehicle, it’s important to understand the terms of the deal. What is the interest rate on the loan you are being offered, and what is the term of the loan? It’s very common to focus on only monthly payment, but it will cost you much more in the long run if you finance the vehicle for 60, 72, or 80 months rather than 24 or 36 months.

In addition, all cars depreciate in value – which means that in 4-5 years, you may still have a car payment but the resale value will be modest at best.  Also consider the maintenance costs on an older vehicle. It’s not uncommon for some major repairs to be necessary at the 100,000 mile mark. However, if your car has been maintained well and has good re-sale value, you might be able to recoup some of your costs if you sell the car.

So Should I Buy or Lease?

Most experts agree that the cost of buying and leasing is about the same for the first few years. There won’t be many repair costs and the various fees and insurance costs come out to about the same. The difference starts after the new car is paid off. Will you have your car for a few years after your car loan is paid off? If so, it typically makes sense to buy the car rather than lease. Check with car review publications to make sure that the car you want will last beyond the years that you’re financing it.

Here some tips when making the decision between leasing and buying:

  • How many miles do you put on your vehicle each year?  If it is more than 15,000 per year, then maybe leasing isn’t for you.  At the end of a lease, you’re assessed additional usage fees if you have above-average mileage or wear and tear.
  • Do you drive the car for business?  When you lease, a portion of the car’s depreciation and financing costs can be deducted on your taxes. Interest on loans to buy a car, however, are not deductible.
  • How much can you afford per month?  Monthly lease payments cover depreciation and taxes only for the time you have the vehicle. That means the payments will be lower than if you buy the same car and take out a loan for the same number of months as the lease.
  • Do I want to sell a car?  Okay, this may seem easy, but there are a lot of steps you need to take when selling a vehicle.  You need to clean up the car, get it ready to sell, show it to interested parties and go through the paperwork.

Buying versus leasing is not exactly a black and white decision.  Both leasing and buying have their advantages and disadvantages, just like renting versus buying a house.  The reality is that buying is generally cheaper in the long run.