There’s no way around it, cars come with price tags high enough to make your bank account cry. If you’ve been wondering whether it’s worth it to lease or buy a car, you’re in exactly the right place.
Maybe you’re considering becoming a car owner for the first time? Buying for the first time can be incredibly daunting, it’s a massive purchase and to avoid potentially costly mistakes further down the road (pun intended!) you must get it right the first time.
But what do you look for? Do you choose a brand new model and have it on finance? Or is a second-hand vehicle better? There’s so much to think about when looking for a car, it can make your brain hurt!
Don’t panic though, in this super useful guide we’ve got some great advice on buying versus leasing. Whether you’re a newbie looking for their first motor or a veteran looking for a bit of extra advice, you’re sure to find this article useful.
From weighing up the pros and cons of buying and leasing and how loans and leases differ, to how financing works, we’ve got all the answers so make sure you keep reading to find out more!
Is it Better to Lease or Buy a Car?
This completely depends on your current financial circumstances, your goals, and general preferences. There are pros and cons to each way so it’s difficult to give a definitive answer. Although leasing usually means you’ll get lower monthly payments, you’re not the owner.
When you’re leasing, you’ll most likely have to abide by strict rules such as mileage limits, which isn’t great if you have a long commute to and from work. You’ll also have to keep the car in virtually pristine condition; no drive-thru trips to Mcdonalds! Once the lease is over you won’t have any equity to put toward the next car.
Needless to say, car buying will be more expensive in the beginning since you’ll have to pay the entire cost of the car. With that said, once you’ve paid for it there’re no more payments!
Before you start searching for your new vehicle, it’s a good idea to decide what you want out of the situation and what your budget will allow, let those considerations drive you to make a sensible and realistic decision.
What Is Leasing?
What exactly is leasing, you ask? Leasing is basically renting for a longer period of time. Unlike buying a car, where you pay the full price, leasing a car involves paying for the amount of devaluation that’s likely to happen during the lease, including any fees as well.
Sometimes you may be required to make a down payment on the car that you’re leasing. The rest of the lease costs are usually split into different but equal monthly payments, interest included. A lease is usually two to three years long, however, the agreement can be written for as long as you want.
Leasing may sound straightforward, but it’s a complicated financial agreement that comes with some complex terms that you wouldn’t have to deal with when purchasing a car. Before you jump in there are a few terms you should become familiar with:
Capitalized Cost – Also called the cap cost, this is the actual price of the car. This is a good time to use your negotiation skills, as you would if you were buying a car you want to lower this cost as much as possible. If you receive any discounts on this cost they’re known as cap cost reductions.
Residual Value – This is an expert’s opinion of what the value of the car will be when your lease ends. You want a residual value that is a higher percentage of the cap cost. Anything lower and you’ll have to pay a larger amount of the car’s capitalized cost.
Money Factor – Rather than use an interest rate when arranging lease contracts, companies use something called money factor. This will tell you how much interest will be included in each of your monthly payments.
What Is Car Buying and Financing?
For the longest time, car buying has been the most common and popular way to drive around in a new car. Typically, you’d negotiate the price for the vehicle in question and then take out a loan to pay for it, not including the down payment if you have one. If you don’t have a down payment then you’d need to pay the whole price straight away, including interest on the loan if you’ve taken one out.
So what’s financing? Financing means the car essentially still belongs to the lender until you’ve paid off the loan in full. Then once you’ve paid it, the car is yours and all monthly payments stop.
The majority of loans for new cars come from banks or finance companies. Once you’ve applied for the loan and you’ve been approved, you’ll receive the funds and you’ll be able to pay for the new car.
Then you simply pay back the amount you’ve borrowed through monthly payments of equal amounts. The duration of a car loan is known as the term. Terms can be just a couple of years long or as much as eight to ten years long. Experts often advise that you don’t take out a loan that’s more than five years
Unfortunately, not many people take notice of this advice, they’re looking for the cheapest option, and the longer the loan time the more affordable and attractive it becomes.
Buying vs Leasing a Car, the benefits of both:
It can seem very confusing trying to decide between these two methods. Which one is best? Which one has the fewest cons? In this section, we’ll take you through a few positives of buying and leasing, so hopefully, you can make the best decision for yourself and your current circumstances.
Benefits of Leasing a Car:
There are a few advantages to leasing that make it a rather attractive option. From lower monthly payments to easy peasy trade-ins, there are a lot of positives to leasing.
Lower Monthly Payments – With car leasing, you’re only paying for the devaluation while it’s in your possession. Unlike buying, you won’t have the whole cost of the car, which means you can enjoy lower monthly payments. Although it’s essential to settle on an amount that you can comfortably afford, buying purely on the payment amount isn’t the best way to choose a new vehicle.
Instead, it’s a good idea to look at the whole cost of the vehicle. We’ve established that the monthly cost of your lease agreement would be lower. This means that you could get yourself a nicer model with added extras.
Better Technology – A feature that keeps prices climbing is the wide range of state of the art technology that’s available. If you lease a vehicle every couple of years, you’ll be able to enjoy updated and exciting technology, including ingenious safety features such as automatic emergency braking, flexible cruise control, and assistance that will keep you in your lane. If you bought a model that had to fit into your budget, you’d probably have to forget about those latest features, unfortunately.
These days, connectivity features are becoming a common installation in cheaper new cars. With the lower cost of monthly payments, you could highly likely afford to lease a more expensive hybrid model, and you’ll save money on fuel too!
Warranty Coverage – With a new car lease, you’ll be covered by the car’s warranty. You shouldn’t be responsible for any repairs that are covered by the warranty because the company service department should deal with them. Needless to say, if you yourself damage the vehicle then you will be responsible for paying the repair bills.
Some leases include intermittent maintenance. Although you will pay for this as part of your agreement, you’ll have a stable and reliable estimate of how much ownership would cost.
Benefits of Buying a Car:
Just like leasing, there are many advantages to actually buying your car, from not being limited to where you can drive to being generally more convenient, let’s take a look at some of the upsides.
You’re The Owner – The most obvious perk of buying a motor is that you immediately become the owner and can do with it as you please. If you take out a loan, the lender has the vehicle title until you pay it off, however, they don’t usually place any restrictions on it.
As you pay off the loan, you’ll own a little more of the car each time you make payment. Your equity will be slow progress at first but as you pay off more and more of the loan, the interest will reduce and your equity will increase. The equity gives you awesome flexibility when you decide to get a new vehicle. If you lease, you won’t have that equity in the car that you choose.
Providing that your equity is more than the devaluation of the car, you’ll have what’s called positive equity in that vehicle. Unfortunately, cars aren’t known for holding their value, and brand new vehicles lose a lot in the first two to three years on the road. For this reason, it’s quite hard to gain positive equity.
One way of combating this problem is to make a fairly large down payment and have the shortest loan term your budget will allow.
Freedom! – Wherever you look, most lease agreements will have mileage limits. If you go over this limit you risk being hit with fees so big they will bring you out in a cold sweat! When you buy a motor, whether you have a loan or not, you won’t have these limits to worry about.
You can drive out of the dealer’s yard, say “Sayonara!” and drive wherever and whenever you want. For this reason, if you have to drive long distances, it’s not a good idea to lease a car. When you buy one there are no penalties or fines for long-distance driving.
You Can Customize It – Want to put fluttery eyelashes on the front lights? When you buy your car you can do whatever you want to it, providing that it’s legal! When you lease you don’t get the freedom to make the car your own, because it isn’t.
When you buy your car, making changes that actually add value to it is a great way of recouping some losses when you decide to sell it. If you made changes to a leased car, you’d have to remove them before giving the car back, resulting in a massive waste of money!
What Are the Downsides of Leasing vs Buy a Car?
So we’ve looked at some of the positives of buying and leasing cars. Unfortunately, it is super important to consider the downsides as well. Whether you buy or lease, it’s a big decision to make and you can’t go into it with rose-tinted glasses. It’s essential that you’re aware of the negatives as well as the positives.
Downsides of Leasing a Car?
Although leasing a motor has its advantages, it’s not the right method for everyone. If you are considering leasing, there are some downsides that you should be aware of so you know what you’re getting yourself into.
You’re Not The Owner – The most obvious downside of a lease is that you don’t own the car. It’s similar to renting a house as opposed to buying one. Because the leasing company has ownership of the car, they can dictate how you use it, how far you drive, and in certain cases, where you can actually drive.
A good example of this is, with some lease agreements you have to have permission to drive the car to Mexico or Canada. If you drive to these places without permission or break any other rules of your agreement, you risk your ride being repossessed.
If the worst happens and the car is stolen then any insurance payouts go straight to the leasing company. You would have to start a new contract all over again, even if you’ve just paid thousands on your previous contract.
You’ll Always Have a Car Payment – When you buy your car or finance one, once you’ve paid off any loans that’s it, you won’t have any more payments. Unfortunately, when you lease, you’ll be plagued with constant payments.
Something else to bear in mind is that when you take out a loan to buy a car, your payments will be consistent, unlike lease payments. Typically, car loans last no more than five to six years, and each month the payments will be the same.
When you lease a car, you’ll get a different monthly payment plan every time you get a new vehicle, which you can expect to be every few years. With the rising prices of cars, it’s safe to say that each lease agreement will be more expensive than the previous one.
Downsides of Buying a Car?
Even though there are many positives to car buying, it’s important to understand that there are some downsides as well. Before you decide which method to choose, it’s important to be aware of the positives and negatives of leasing and buying.
It Means Paying More In The Short Term – When you buy a car, the monthly payments are nearly always higher than the lease payments on a car with the same value. This means they’re more expensive on a monthly basis when you take out a car loan. However, once that loan is paid off, owning your own car is cheaper every month.
It is possible to manage how large your car payments are. One way is to make a substantially sized down payment. To do this it’s a good idea to save up for a few months before you start looking for your new set of wheels.
If you’re selling your current motor, the purchase price of it can then go towards the down payment for your new ride. To make sure you get the most for your current vehicle, try to sell it to a private buyer rather than a dealership who will only offer trade prices.
You won’t know it’s future value – Although you may be able to predict the car’s resale value, your estimate is not guaranteed to be correct. When you lease, the car’s future value is stated in the contract before you even sign it.
How to Find the Best Car Lease Deals
So you’ve decided to go down the leasing route, but what now? Don’t worry, a lease is much easier if you know what to look for. In many ways, starting a lease agreement is a lot like purchasing a car. As long as you do your homework, you can end up with a new car lease and a great deal.
First of all, you need to decide what your needs and preferences are. Are you a single person who doesn’t need a massive vehicle, or are you a couple with three children needing a minivan to accommodate a family of five? Once you’ve decided what you need, compare some models that fit your needs. What features do they offer? Is it economical? What about safety?
The next step is to go to a dealership and test drive a few models. Don’t forget to ask any questions you have, you need to be sure this is the one for you. Once you’ve tried out a few cars, chances are you’ve managed to narrow them down to just a few favorites. Work out and compare the running costs between those favorites to find your winner.
Once you’ve decided on a car, go to the dealership to work out a lease plan. Your aim is to get the best deal possible, so don’t be afraid to haggle. Once you’ve signed the contract, ensure you know what the terms are. Make all of your payments on time to avoid any hefty fines and always honor the length of your lease agreement.
How Loans and Leases Differ:
You may be wondering how a loan is different from a lease. It’s important not to confuse these two terms as they both have their own rules and results. As we talked about earlier, financing is when you take out a loan to help you buy the car. Leases involve you paying monthly to use the vehicle for a certain amount of time, which is agreed by you and the lender before the contract begins.
As long as you pay all of the required payments, financing a car means that you own it, unlike with a lease where you’re not the owner, you’re merely borrowing it. The bottom line is, financing helps you to buy the vehicle, leasing means you’re renting it.
Weighing the Pros and Cons of Leasing a Car
Whether you decide to lease or purchase a car, you need to weigh up the pros and the cons of each method, before you make your decision. Although purchasing a new vehicle is more expensive to begin with, in the long run, it will save you way more than leasing will.
Car lease deals are like apartment or house renting. You get monthly payments that are sustainable and manageable and you get to drive a nice model. However, it’s not yours. You’re spending money on something that is owned by someone else.
Unfortunately, there’s no definitive answer as to whether you should lease or buy your new car. It completely depends on your personal circumstances, financial situation, and goals. If becoming a car owner is your dream, then it’s really not worth even considering leasing.
If you’re serious about purchasing a new motor, it’s well worth saving up beforehand so you’re able to put down a sizable down payment and in turn reduce your loan costs. Becoming a car owner means you’ll have equity that could help in purchasing your next vehicle. You also won’t have any of the restrictions that you would have with a lease.
Is it worth it to buy or lease a car?
This completely depends on how badly you need a ride. If you know that you won’t be using it that much then it may not be worth it. If you work from home and you have amenities within walking distance from your house then it could be an unnecessary purchase. It all depends on what your personal goals are.
If a motor is not very high up on your list of goals and you don’t desperately need one for transport, then it may be wiser to stick to the odd public transport trip. Cars are expensive and if you’re already on a tight budget, the stress of having to pay for a car as well wouldn’t really be worth it.
On the flip side, if you need to travel long distances regularly, such as long work commutes, a vehicle is a necessity. Public transport can be slow and unreliable so in this case, it would be very much worth it. Or maybe you have kids who you need to chauffeur to swim or soccer practice, in this case, a car would definitely come in useful!
When it comes to buying vs leasing, however, it’s difficult to say. They both have their upsides and downsides. If haggling is something that you hate, then leasing may be the ideal choice for you. When you lease you just have to hand it back at the end of the term.
However, if you look at the potential long-term financial outcomes, auto leases tend to seem less worth it than purchasing a new vehicle. You won’t gain any equity and you may have to pay other fees that you wouldn’t have to pay with a car loan.
You also get very little flexibility with a lease. The leasing company will put heavy restrictions on what you can do with the vehicle and how much you can drive it. When you buy a new vehicle, it’s yours straight away, providing you pay the full amount yourself.
If you take out a loan, technically the lender owns the vehicle to begin with, however, you’ll own it a little more with each payment you make. A lender also usually won’t place any restrictions on it.
Why Leasing a car is a bad idea?
On the surface, leasing sounds like the perfect scenario; you get to drive a nice vehicle with low monthly payments, sounds perfect, right? Unfortunately, it’s not that straightforward. The bottom line is, the decision to lease or buy is based completely on your personal preference. Would you prefer to drive a new vehicle and update it every few years, but not actually own it, or pay more to buy a vehicle that you will own straight away.
In a perfect world, everyone would be able to pay cash for their new rides and be able to avoid paying interest and devaluation fees. Unfortunately, we don’t live in a perfect world and many people can’t afford to pay cash upfront.
If you’re on a budget, it’s understandable that a lease can look very attractive. You can get a brand new set of wheels and a lower monthly payment plan than if you took out a loan. But leases can be a huge waste of money in the long run.
You’ll be subjected to all sorts of heavy restrictions, and although a lease agreement allows the usual wear over the years, if you give it back and the dealership decides it’s sustained more wear and tear than they think it should have, they can charge you extra. If you do decide to go down the leasing route, make sure you grill the dealership on what they expect as normal wear and tear, so you don’t receive any nasty surprises when the lease ends.
For most people, buying is almost always a better option. Leasing doesn’t make much sense, financially. If you’re very financially comfortable and you don’t particularly want the responsibility of being a vehicle owner, then maybe leasing a good choice, otherwise purchasing your vehicle will work out better in the long term.
What are the pros and cons of leasing or buying a car?
As we talked about earlier, both routes have a long list of upsides and downsides. You may still feel utterly confused and unsure of which method to choose. When it comes to a lease, one positive is that you can simply hand it back to the dealership when your lease ends.
When you buy the vehicle, deciding to sell it can bring a whole load of hassle to the process. You’ll have to deal with buyers trying to haggle or just being general timewasters. With a lease, you have none of these annoyances, you don’t even have to worry about its value.
Once your agreement is over, all you have to do is return the vehicle to the dealership. There may be some fees and a few bits of paperwork to go through, but you won’t have to bargain about the value of it. The residual value of the vehicle would have been set at the start of the lease and it’ll stay the same at the end.
When you lease a vehicle, you may save on sales tax. In some areas, you’re only required to pay sales tax on the size of the down payment, as well as the monthly costs. However, in some places, you have to pay the sales tax for the whole cost of the vehicle. This can make a lease significantly less tempting.
When you purchase a vehicle, you’re usually responsible for paying the sales tax of the entire cost of it, not including any trade-ins. Before you decide to lease, it’s a good idea to seek guidance on the tax laws in the area you live in.
Is it best to lease or buy a used car?
Although you can lease a used car, it’s not as common as a new vehicle lease. Taking into account how uncommon it is, it may be difficult for you to find a dealer who will write up a lease agreement, even though it’s slowly becoming more and more popular.
The used cars that are usually available for lease are approved cars at a new vehicle dealership. Different cars devalue at different rates, some hold onto their value for a while while others lose it quite quickly. This makes it harder to predict the cost when they are leased out.
Whichever company you choose, they will normally use the most middle-of-the-road values when predicting a used vehicle price. This is so they don’t risk losing too much money if the car’s price decreases quicker than predicted. This protects the company but makes it more expensive for you.
The rate of depreciation commonly flattens out as cars age more. This means that you could get a good deal. You may be able to afford an older luxury car for the same price as a newer but less fancy model. Do bear in mind though, used cars won’t usually have warranty coverage, meaning you’ll be responsible for any repair costs.
Can I buy the car that I’m leasing?
If you’ve been considering purchasing the vehicle that you have on a lease, it’s important to think about it carefully before you jump in. First of all, you need to check your contract and see if you can actually buy the vehicle once the agreement ends.
Doing your research and a bit of number crunching can help you decide if it makes financial sense or not. Take a look at your contract and find the residual amount, which is also known as the buyout amount.
Opting to pay the buyout price could be expensive. The vehicle is normally a few years old by the time the agreement ends and the residual can be very high. You can pay the amount with cash, however, there are options to help with financing it if you need extra help.
There is a buyout loan that you can apply for to help you pay for the vehicle and you can get a car loan from some lenders who offer loans for buying new and used cars. You could also have financing options arranged through the dealership as well, however, make sure you explore all other options so you get the best deal.
Is buying a car more expensive than a lease?
By knowing how to work out the total cost of a lease agreement and a purchase, you’ll be able to figure out if you’re getting the best deal possible. Whether you lease or buy, it’s vital that you work it out by yourself. Letting the dealership work out the numbers is not a good idea and it won’t help you understand every detail of the transaction.
Purchasing your vehicle does work out more expensive to begin with, especially if you take out a loan to pay for it. However, once you’ve paid off that loan there are no more monthly transactions and the vehicle is completely yours. Putting down a bigger down payment will help to keep the loan repayments down too.
If you’re on a budget, a lease can look very inviting. You often have much lower payments than if you were buying. But it does have its downsides. Unlike with a purchase, you’ll always be paying for it, there’s no loan to pay off and you’ll have to keep to the end of the agreement, which can be a few years long.
The decision whether to buy or lease completely depends on your personal financial situation, your circumstances and your future goals. It’s essential to make the right decision, to avoid any costly mistakes.