Considering Leasing or Buying? 9 Questions to Ask Yourself
Are you in the market for a new car? Before you start picking out your favorite model and color, make sure you’re being smart about whether you choose to lease or buy your new vehicle. Leasing is generally the better option for short-term savings, but in the long run, opting to buy could be well worth the money you have to pay upfront. Ask yourself the following questions, and you’ll know the best option for you in no time.
Leasing a car is all about saving money upfront. You will likely have a lower down payment and lower monthly payments if you choose to lease. The Department of Motor Vehicles explains the payment difference as follows: “When you buy a car, you’re financing the entire value up front. On a lease, you’re paying for the difference between the car’s current price and its expected value at the end of your lease term.” When you sign a lease, the future resale value of your car is set. Even if your car depreciates faster than predicted, you are not liable for this reduced value. In fact, if your car depreciates more than expected, it could benefit you if you decide to purchase at the end of your lease.
One little-known fact is that you don’t actually need to make a down payment to buy a car. It’s preferred, but if you have a good credit score—and the loan amount is something you can afford to pay off given your salary—many banks will be willing to offer you a loan anyway. So don’t jump to the conclusion that you need to lease just because you don’t have a couple grand in the bank. This brings us to our next point…
Poor credit will cause you to have a higher monthly payment for both leasing and buying a car. If you have a strong credit score, you can procure a low monthly payment on a lease or a low interest rate on an auto loan to buy the car.
When you opt to own a car, your mileage is completely unrestricted. You can take as many road trips as your heart desires. Most leases, on the other hand, have annual mileage limits (usually 10K or 12K miles per year). Before opting to lease, consider roughly how many miles you plan to drive a year. If cross-country road trips are on the agenda, we suggest buying. Going over your mileage limit on a lease can result in costly overage charges—anywhere from $0.15 to $0.25 per mile. These may sound like insignificant fees, but they definitely add up quickly.
If you want to keep your car for a long time (i.e., four to five years or more), buying is a solid option. Most leases last about three years, at which point you have to spend more money to lease another car or pay the difference to keep the car you have. If you buy a car, at the end of a few years of car payments, you have a car to drive around that’s yours free and clear.
If there is a possibility you’ll be moving to another country in the next few years, think twice before signing a lease. Terminating your lease early can be extremely costly. If you want the option to sell your car on a whim, opt for buying.
When you lease a car, you are responsible for the wear and tear you inflict on it. At the end of your lease, you are required to return the vehicle in a “good, non-altered condition.” This means payment for all of the dents, scratches, and other damages on your car are due at the end of your lease term. When you own your car, you decide what to fix and when.
Want to customize your paint job? Or tweak any aspect of your car? If you own your vehicle, you can change and modify it at any time. When you’re leasing, you can’t make any modifications.
It’s imperative to know your cash flow as well as your credit score. According to Experian Automotive, lease payments are significantly less than loan payments. For example, the average lease payment for a Jetta in 2014 was $287 while the average loan payment was $389. If you can afford the higher monthly payment, it’s definitely worth considering buying.
In addition to lease or loan payments, you’ll also have to consider the costs of maintenance (like regular oil changes) and repairs that are not covered by the car’s warranties. Both of these costs are typically included in your lease, but if you own your car, they’ll be coming out of your pocket. Leasing also usually includes a minimum level of insurance coverage, but ownership requires you pay for your own insurance completely. If you’re considering owning, make sure you’ll have enough cash flow to cover regular maintenance, unexpected repair costs, and insurance.
The biggest difference between leasing and buying a car is what you are left with after paying off the lease and/or financing. In 24 to 36 months, do you want to own the vehicle you’ve been driving for the last few years? Or would you prefer to drive a brand-new car every few years? Do you even want to have an automotive possession under your name in a few years? If you want to own your car free of car payments, then buy. If you don’t want to be tethered to a vehicle in a few years, consider leasing.
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Do you have any tips when it comes to leasing or buying? Share with us in the comments.