When you are thinking of purchasing your first car, you might wonder if it makes more sense financially to buy a car or to lease a car. This is an important decision, but once you understand the terms and conditions involved in both a lease and purchase you can make a comparison to see which makes sense for you.
Whether you choose to buy or lease your next car depends wholly on your goals, budget, and personal preferences.
Both buying and leasing cars have their benefits; the key is determining which of those benefits matter the most to you.
Leasing a car
On a basic level, leasing a car is like leasing an apartment. You pay a certain amount of money per month to use the car in a manner, similar to owning it. However, you do not build equity in the car and will have to return the car at the end of the lease. Additionally, like leasing an apartment, you may be on the hook for repairs and maintenance. It is important to carefully read over the lease before you sign it so you know exactly where your responsibilities lie.
Benefits of Leasing a Car
If you want to go this route, then you know the right way on how to lease a car. Here are 6 advantages of leasing a car:
- Lower monthly payments. The cost to lease a car is typically much lower than to buy one. Little or no down payment is required, and you don’t have to pay any upfront sales tax. However, when you return a leased vehicle, you may have extra charges for racking up mileage that exceeds the allowable limit, terminating a lease early, or having any unrepaired damage.
- Never being “upside-down.” When you lease a car you rent it for a fixed term, which is typically one to 4 years. The amount you pay each month is tied to the amount of depreciation that’s expected during the lease term. (Different makes and models of vehicles depreciate at different rates.) You only pay for the depreciation of the car that occurs during your lease term and you can never be “upside-down,” which is a common situation where vehicle owners owe more than their car is worth.
- Fewer repair expenses. If you’re covered by a manufacturer warranty during your lease term, you never have to worry about getting hit with a large, unexpected repair bill. However, you are still responsible for regular upkeep, maintenance, and the minimum amount of auto insurance required by the state where you live.
- Driving a new car more often. If you lease a new vehicle every few years, you will always have the benefit of driving a car with the most up-to-date technology, comfort, and safety features.
- Never having to sell a vehicle. Once a “closed-end” lease term expires you can simply return the vehicle or choose to initiate a new lease for a different vehicle. But you never have to go through the hassle of selling a vehicle yourself or being concerned about getting a fair trade-in value. Or you may have the option to buy a vehicle at the end of the lease term for a pre-set price. That could be a good idea if the vehicle is worth more than the agreed-upon purchase price—or a bad idea if it is worth less money.
- No loan approval required. If you have less than stellar credit, you may not be approved for a car loan–or you’ll have to pay an outrageous amount of interest. Leasing companies typically aren’t as strict as lenders because they can easily take back the vehicle if you don’t make payments or if you violate any lease terms
The Disadvantages of a Car Lease
Leasing a car presents many financial issues. For example, at the end of the lease, you have nothing to show for all the money you’ve spent. You must either turn the car in to the dealer (where they may try to convince you to trade up to a new lease), or you must purchase the car at the end of the lease.
There are also unexpected fees associated with leasing a car. Unless you’re constantly vigilant, the mileage limits are often difficult to stay under, and you could find yourself paying hundreds in over-mileage charges at the end of your lease.
Do the Math
If you’re unable to buy outright, it’s generally best if you’re able to pay off the car within three years, which keeps the amount you pay for interest to a minimum. As a benchmark, your total monthly debt, which would include your car payment if you finance it, should be less than 25 percent of your current gross income. If you stick within these parameters, you will keep yourself in a much better situation financially. The lower your overall debt-to-income ratio, the more likely you are to be approved for a mortgage and other loans.
If you are having trouble qualifying for a car loan, you may have to buy with cash, which can limit your purchasing power. You must meet the same credit qualifications to lease or buy. If you’re financially strapped for a bit, consider investigating and joining a car share for transportation while you save up cash to purchase your car.