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Buy or Lease? Tips to Help You Decide

When considering a new car, you might be wondering which makes more sense - buying or leasing. While both options provide some great benefits, there are several things to consider to determine which is right for you.

What Does It Mean to Lease a Car?
First, it helps to understand what leasing a car really means. When you lease, essentially you are renting the car, typically for 2-3 years. At the end of the lease term you will return it to the dealership, or you can decide to purchase the car with a new loan.

When you lease a car, you pay a monthly payment, which is a form of financing. When you lease you essentially only pay for the depreciation of the vehicle that will occur during the lease term. This is one reason why monthly lease payments are usually lower than a monthly payment when you purchase a vehicle.

When you sign a lease, typically you need to make a down payment along with taxes and fees, this amount can vary but plan on $2,000 - $3,000 to be safe. Another consideration is keeping up the condition of the car, when your lease is up and the car is returned to the dealership, the condition of the car will be inspected. Normal wear and tear is factored in, but dings or scratches could count against you and cost extra when your term is up.

Your lease agreement will also include stipulations about the number of miles allowed over the course of the lease, typically 12,000 - 14,000 per year.  If you go over your allotment of miles, you will owe extra when your lease term is up, usually .15 per mile.

What Does It Mean to Buy a Car?
When choosing to buy a car, you borrow the entire price of the vehicle up front, minus any trade-in-value or down payment. Most people choose to finance their price of the car and spread out payments over 60 months (5 years).

As with leasing, factors such as the amount of your down payment, trade-in-value of your current vehicle, and quality of your credit score will impact your monthly payment. The difference here is your payment isn’t just based on depreciation, but the actual price of the car.  So while monthly payments may be a bit higher and spread over more time, you aren’t limited in the miles you choose to drive, among other factors.

When the loan is paid off, the car is yours. Or, if you decide to sell the car before your loan is completed you are free to do so. You can trade it in for another vehicle or sell it to a third party.  What you make on the sale will depend on how much you have left on your loan.

Who Might Benefit from Leasing a Vehicle?

  • Those who live in an area where they walk to work or take public transportation and just need a car occasionally or on the weekends.  Or those who may have a company car and only need a secondary vehicle every now and then.
  • Someone who only needs a car temporarily. Perhaps you are transferred to a new city for a few years and need a vehicle - but one you don’t need long term.
  • Buyers who like to purchase a new car every 1-3 years.  These buyers are usually familiar with leasing. They don’t plan on going over their mileage allotment and lease with the plan to return the car in good condition, and begin a lease on a newer car.

When Might Buying Make More Sense?

  • Families with young children - even parents of the best-behaved children can attest to a spilled sippy cup or melted crayon on the seat from time to time.  Unless restored to the original state, these kinds of accidents can cost you extra when you lease. When you own the car, you may not approve of the mess, but you won’t be penalized for it.
  • Someone who isn’t 100% comfortable staying in the mileage allowance limits of a lease.  Driving over your limit will cost around .15 per mile. Clock an extra 1,000 miles during a three-year lease and you can expect around $450 extra when your lease is up. When you purchase a car, you are free to drive as many miles as you choose.
  • Are you hard on your vehicles? Do you drive rocky roads, transport kayaks, mountain bikes or other sporting equipment on a regular basis? These items can cause dings or scratches which could cost you when your lease term is up. In these cases, buying is often the best option.
  • Those who plan to keep their car for a long period of time, even after the loan is paid off. For drivers who keep their cars for 5, 7 or even 10 years, buying is usually the better financial option.

Making The Decision to Buy or Lease a Car
Choosing to buy or lease a car is based on financial health and personal preference. Both offer pros and cons depending on your needs and lifestyle. 

10 Factors to Consider When Deciding to Buy or Lease a Car Leasing Buying

Factors Leasing Buying
Overall Ownership You don’t own the car. You are essentially renting it and must return, or choose to buy it, at the end of the lease term. When you sign on the dotted line, the car belongs to you for as long as you choose to keep it. 
Vehicle Return You return the car at the end of the lease term, pay any end-of-lease costs, and don’t have to deal with anything else related to the car unless you purchase it.  When you are ready for a new car, you can sell your current car, or trade it in at any time.  
Termination Canceling the lease term early could result in penalty fees as much as the actual lease costs. You can easily sell or trade-in the car at any point and use the funds to pay off an existing loan, or use the equity in the vehicle as down payment on a new one.
Upfront Costs Usually the first month’s payment, a refundable security deposit, down payment, taxes, acquisition fee, registration, and additional small fees are due at signing. In many cases the upfront costs of leasing are the same as purchasing a car.  Cash price, down payment, taxes, registration, and additional small fees. If you are trading in an existing vehicle, the equity in the vehicle will count towards your down payment.

 

Monthly Payments Lease payments are generally lower than when you own the car, because you’re only paying a monthly fee for the depreciation of the vehicle during the lease term, including rent charges, taxes, and fees. Since you’re paying off the entire price of the vehicle, loan payments tend to be higher, including taxes, fees, finance charges, and interest.
Possible Risks Since the car never really belongs to you, you can be held responsible for out of the ordinary wear and tear of the vehicle, dings or scratches.  Additional wear and tear could lower the value of the car once you’re ready to sell it or trade-in, but you’re not held responsible for any damage.
Customization You have to return the vehicle to a sellable state and the end of the lease term, which is why any customized features have to be removed beforehand. For residual damage, you’ll need to file an insurance claim. Since the car belongs to you, you can do as you please, but it is important to remember that any customization may void the car’s warranty. Choose wisely when considering to buy or lease a car in terms of customization.
Mileage Needs When leasing, you’re often given 12,000-15,000 miles per year allowance.  Once exceeded, you may have to pay additional charges when you return the car.  You can clock as many miles on the car as you please without any restrictions. 
Future Value When you lease, the decline in the future value of the car doesn’t impact you as you only have the car for a short amount of time, then can turn it in at the end of your lease.   The cash value is yours to do with as you wish, even if the value depreciates with time.
End of Term Requirements At the end of the 2-3 year lease period, you can trade in your leased vehicle for a new lease term or choose to purchase the car.  Once you’ve made the final payment on the car, you can drive the car payment-free. In many cases buyers have equity in the vehicle which they can use for trade-in value on a future purchase.

Ready to take the next step?  Use our vehicle loan calculator to estimate your payment or learn more about our flexible vehicle loan terms and competitive loan rates.