There are a lot of choices to make when you decide to get a new vehicle. Sedan or SUV? What make, model, and color? When deciding what kind of car to buy, it’s important to give equal consideration to whether it makes more sense for you to buy or lease it. The decision of whether to buy or lease a car will impact your monthly costs, total costs, and your overall flexibility with the vehicle. Let’s take a closer look at both options.
Leasing a Car
When you lease a car, you agree to pay a set monthly amount for a specific period of time, during which you’ll be able to use the vehicle. For example, you might enter into a lease agreement for $399 per month, for 36 months. When you lease a car you’re not typically required to make a down payment, but doing so could help reduce your monthly payment. With a lease, you won’t actually own the car. Rather, the car will remain property of the leasing company and you’ll essentially pay to rent it long-term. At the end of your lease, you’ll typically give the vehicle back, but some leases do include an option for you to buy the car at the end of your lease.
Advantages of Leasing:
- Lower monthly payments. With a lease, your monthly payments are typically lower than they would be with a car loan.
- Able to get a new car more often. If you continuously lease vehicles, rather than buy them, you can get a new car every few years. In other words, when one lease is up, you can simply lease another car. With this method, you’ll always enjoy the latest technical innovations and safety features.
- Less major maintenance concerns. With a lease, you get to drive the car during what should be its most trouble-free years. Usually, a car is still under warranty during the full lease term, so you won’t have to worry about the cost of major repairs.
- Don’t need to worry about selling. At the end of your lease term, you don’t have to stress about selling the vehicle or getting a good trade-in value for it. You just give the car back, and move on to your next vehicle.
Disadvantages of Leasing:
- Have to be mindful of mileage. There is usually a mileage limit on a leased car, which typically ranges from 10,000 to 15,000 miles per year. If you go over your mileage limit, you’ll typically have to pay between 15 to 30 cents for each excess mile at the end of the lease. Mileage overage fees can add up quickly, so it’s important to understand how many miles you’ll likely be putting on the car before you enter into a lease agreement.
- Cannot change exterior or interior. Because you don’t own the car with a lease, it isn’t yours to change. Most lease agreement do not allow you to do things like tint the windows, paint the car, or swap out audio equipment.
- May be charged for minor damage. If the car isn’t in good shape when you turn it in, you may be charged for excess wear and tear. You could face fees for things like minor dings and scratches, interior stains or rips, worn tires, or damage caused by smoking.
- You’ll likely be responsible for regular maintenance. Most lease agreements will outline exactly what maintenance needs to be done on the car and when. You’ll typically be responsible for getting oil changes and tire rotations and having the vehicle’s fluid levels checked. You should also keep good records of the maintenance you have done, in order to avoid a penalty at the end of your lease.
- The car will never be an asset. Because a lease is essentially a rental agreement, your monthly payments don’t go toward eventually owning the car. So, instead of building up an asset with each payment you make, you will have nothing of value at the end of your lease.
Buying a Car
When most people buy a car, they take out a loan to cover part of the purchase. Typically, you’ll pay for a portion of the car upfront, as a down payment, and the remaining cost will be spread out over several years in the form of a monthly payment. These payments will typically also include interest. When financing a vehicle, you can take out an auto loan from a bank, or you can obtain financing from the dealership, if they offer it. While you won’t technically own the car until you pay off your loan, the car is yours to use - and change - as you wish. Then, once the loan is paid, you can continue to drive the car without having to make any payments, or you can sell the vehicle or trade it in and use the proceeds toward another car purchase. When you buy a car you can customize it in any way you choose, and you don’t have to be concerned about how many miles you drive.
Advantages of Buying:
- Car will become an asset. With every payment you make toward your car loan, you gain equity in the vehicle. In other words, you’re not throwing money away each month, but rather you’re working toward owning the vehicle outright. Once you’ve paid off the loan, you’re left with an asset that you can sell down the road if you so choose.
- Less expensive in the long run. While your monthly payments might be less with a lease, buying a car is almost always less costly over time, because you retain ownership of the car after your loan is paid off. When you jump from lease to lease, you’re constantly paying a monthly payment. But, if you take out a 5-year loan on a car and keep the car for 8 years, that’s three years of not having to make a car payment.
- Freedom to do what you want with the car. When you purchase a car, you can put as many miles on it as you’d like, and you don’t have to stress about every little coffee spill or minor ding. You can also make whatever modifications you want to the car.
Disadvantages of Buying:
- Interest charges. If you take out an auto loan, you’ll likely end up paying interest (unless you’re lucky enough to get interest-free financing). To reduce your overall interest charges, you might be tempted to shop around for the best rate, which can slow down the buying process.
- Depreciation. Unlike homes, cars typically lose value over time, as they become outdated and newer models are introduced. Natural wear and tear will also cause a vehicle to depreciate in value. So, when it comes time to sell your car down the road, you will likely only get a fraction of what you paid for it.
- You could end up upside-down on your loan. Because of interest charges, and depreciation, you could end up with negative equity on your vehicle. This typically happens when you take out a long-term car loan (with payments spread out over seven or eight years) and there is a period of time where you owe more than the vehicle is currently worth.
There isn’t a single right choice when it comes to buying or leasing. Your decision should depend on personal factors, such as how long you plan to keep the vehicle, how many miles you expect to drive each year, and how much you can afford to pay each month. However, it is worth noting that most experts agree that buying a car is a more financially sound decision than leasing.
If you are looking for an auto loan in Massachusetts or Rhode Island, BankFive may be able to help. Contact us for more information today, or start an application, for both new and used vehicles.