Comparing the two major finance choices.
The choice between buying and leasing a car is often a tough call. On the one hand, buying involves higher monthly costs, but you own an asset—your vehicle—in the end. On the other hand, a lease has lower monthly payments and lets you drive a vehicle that may be more expensive than you could afford to buy, but you get into a cycle in which you never stop paying for the vehicle. With more people choosing a lease over a loan than they did just a few years ago, the boom in leasing isn’t stopping anytime soon.
Buying a vehicle with a conventional car loan is pretty straightforward. You borrow money from a bank, credit union, or other lending institution and make monthly payments for some number of years. A chunk of each payment is put toward paying interest on the loan and the rest is used to pay down the principal. The higher the interest rate, the higher the payment. As you repay the principal, you build equity until—by the end of the loan—the car is all yours. You can keep the car as long as you like and treat it as nicely—or poorly—as you want to. The only penalties for modification or abuse could be repair bills and a lower resale value down the road.
As car prices rise (cresting the $48,000 mark in August 2022), leasing a new vehicle remains an alternative. However, according to Experian, one of the credit reporting agencies, the percentage of all new vehicles that are leased is down in the first quarter of 2022 when compared with both 2020 and 2021.
With a lease, buyers make a monthly payment to drive a new car for a set term. That payment is often less than the monthly cost of financing a new vehicle, but buyers must return the car at the end of the lease term.
With more people than ever working from home, the mileage restrictions on a lease may not be a factor for a lot of shoppers. Quite the opposite: Many might find they don’t use the miles they have paid for.
The predictability of the payments and ownership costs (no expensive repairs when under warranty!) has its appeal. However, life can be unpredictable, and a lease has less flexibility than a purchase.
To find out whether leasing or buying is right for you, we take a look at the pros and cons.
The Upside of Leasing
On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back any principal. Instead, you’re just borrowing and repaying the difference between the car’s value when new and the car’s residual—its expected value when the lease ends—plus finance charges.
The Major Advantages of Leasing
- You drive the car during its most trouble-free years.
- You’re always driving a late-model vehicle that’s usually covered by the manufacturer’s new-car warranty.
- The lease may even include free oil changes and other scheduled maintenance.
- You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
- Your vehicle will have the latest active safety features.
- You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.
- There could be significant tax advantages for business owners.
- At the end you just drop off the car at the dealer.
Disadvantages to Leasing
As attractive as a lease may appear, there are a number of disadvantages:
• In the end, leasing usually costs you more than an equivalent loan because you’re paying for the car during the time when it is most rapidly depreciating.
• If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.
• Lease contracts specify a limited number of miles. If you go over that limit, you’ll have to pay an excess mileage penalty. That can range from 10 cents to as much as 50 cents for every additional mile. So be sure to calculate how much you plan to drive. You don’t get a credit for unused miles.
• If you don’t maintain the vehicle in good condition, you’ll have to pay excess wear-and-tear charges when you turn it in. So if your kids are apt to go wild with Magic Markers or you’re a magnet for parking lot dents and dings, be prepared to pay extra.
• If you decide that you don’t like the car or if you can’t afford the payments, it might cost you. You will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they’ll all be due at once. Those charges could equal the amount of the lease for its entire term.
• With a few exceptions, such as professional window tinting, you need to bring the car back in “as it left the showroom” condition, minus usual wear and tear, and configured like it was when you leased it.
• You’re still on the hook for expendable items such as tires, which can be more expensive to replace on a better-equipped vehicle with premium wheels.
• You may have to pay a fee when you turn in the vehicle at the end of the lease.
An Alternative to Long Car Loans
Some car buyers opt for longer-term car loans of six to eight years to get a lower monthly payment. But long loans can be risky, and these buyers might find leasing to be a better option.
Longer loans make it easy to get “upside down”—when you owe more than the vehicle is worth—and stay that way for a long time. If you need to get rid of the car early on or if it’s destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.
Buying a car with a loan isn’t the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading in early will leave you paying so much in finance charges compared with principal that you’d be better off leasing. If you can’t pay off the difference on an upside-down loan, you can often roll the amount you still owe into a new loan. But then you end up financing both the new car and the remainder of your old car.
If your goal is to have low monthly payments and drive a new vehicle every few years with little hassle, then leasing may be worth the additional cost. Be sure, however, that you can live with all of the limitations on mileage, wear and tear, and the like.
Difficult Comparison Between Cars Loans and Leases
It’s difficult to make a fair head-to-head comparison between, say, a six-year loan and the standard three-year lease. At the point the lease ends, the bank borrower still has three years of payments to go, but the lessee has to look for another car—or perhaps take the lease’s buyout offer.
A lease can also be subsidized, or “subvented.” The automaker either takes money off the top with an extra rebate just for lease deals, or it can raise the residual, or both.
An automaker may also kick in extra rebates on a lease deal, ones not available to a loan customer. In addition, the “money factor” (interest rate) on a lease may be different from the interest rate offered on a loan, making an apples-to-apples comparison almost impossible.
In general, two back-to-back three-year leases will cost thousands more compared with buying a car (with a loan or with cash) and owning it over that same six-year period. And the savings increase for car buyers if they continue to hold on to the car, say, for another three years for nine years total, even factoring expected maintenance and repairs.
If a lease’s limitations put you off, consider buying a less-expensive new car or a well-maintained used car, such as a certified pre-owned vehicle from a franchised dealer, or getting a longer loan term. Whether you get your new car with cash, a loan, or a lease, you can save by choosing one that holds its value well, stays reliable, and gets good fuel economy.
For savings up front and over the long haul, buy used. And pay cash.
Don’t Forget to Negotiate
Many people assume that the monthly payment printed in a leasing ad is etched in stone. But that figure may be based on the manufacturer’s suggested retail price, which can be negotiated downward just as if you were buying the vehicle.
Be aware, though, that the best lease deals are available only to those with superb credit, and that they may only be cheap because the automaker is trying to clear the decks of slow-selling cars.
How Car Loans and Leases Differ?
Below are some of the major differences between buying and leasing.
|Ownership||You own the vehicle and get to keep it as long as you want it.||You don’t own the vehicle. You get to use it but must return it at the end of the lease unless you decide to buy it.|
|Up-Front Costs||They include the cash price or a down payment, taxes, registration, and other fees.||They can include the first month’s payment, a refundable security deposit, an acquisition fee, a down payment, taxes, registration, and other fees.|
|Monthly Payments||Loan payments are usually higher than lease payments because you’re paying off the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.||Lease payments are almost always lower than loan payments because you’re paying only for the vehicle’s depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees.|
|Early Termination||You can sell or trade in your vehicle at any time. If necessary, money from the sale can be used to pay off any loan balance.||If you end the lease early, charges can be as costly as sticking with the contract. On occasion a dealer may buy the car from the leasing company as a trade-in, letting you off the hook.|
|Vehicle Return||You’ll have to deal with selling or trading in your car when you decide you want a different one.||You return the vehicle at lease-end, pay any end-of-lease costs, and walk away.|
|Future Value||The vehicle will depreciate, but its cash value is yours to use as you like.||On the plus side, its future value doesn’t affect you financially. On the negative side, you don’t have any equity in the vehicle.|
|Mileage||You’re free to drive as many miles as you want. But keep in mind that higher mileage lowers the vehicle’s trade-in or resale value.||Most leases limit the number of miles you may drive, often 10,000 to 12,000 per year. (You can negotiate a higher mileage limit.) You’ll have to pay charges for exceeding your limits.|
|Excessive Wear and Tear||You don’t have to worry about wear and tear, but it could lower the vehicle’s trade-in or resale value.||Most leases hold you responsible. You’ll have to pay extra charges for exceeding what is considered normal wear and tear.|
|End of Term||At the end of the loan term, you have no further payments and you have built equity to help pay for your next vehicle.||At the end of the lease (usually two to three years), you can finance the purchase of the car, or lease or buy another.|
|Customizing||The vehicle is yours to modify or customize as you like, although doing so may void your warranty.||Because you must return the vehicle in salable condition, any modifications or custom parts you add have to be removed. If there is any residual damage, you’ll have to pay to have it fixed or you’ll need to file an insurance claim and pay a deductible.|
To read the full article, click here.