We’ve all heard those typical dealership commercials advertising their latest financing specials. Sometimes they’re talking about buying, other times about leasing - but in the end they want your money one way or the other. So which is better: leasing or buying?
Like anything as complex as buying a car, the answer is simple: it depends. Leasing and purchasing each have their pros and cons; depending on your circumstances, driving needs, and ownership plans, either option might be the better one for you.
To shed some more light on leasing and buying, we’ve gone ahead and hashed out some of their details and intricacies. Here’s some important traits of each that you’ll want to consider:
Well, the first thing to know is that you don’t really own the car at all. A leased car is more akin to a rental agreement than ownership: you pay an agreed-upon monthly fee for the right to drive that specific car. In two or three years - or whatever the duration of the lease is - you return the car to the dealer, at which point you will in all likelihood lease another new car and thus begin the process anew. You never own the car.
Lease Agreement Limitations
Because you don’t own the car, you have to play by the rules of the lease. These rules could vary, but in nearly all instances they include annual mileage limits, commonly ranging between 12,000 and 15,000 miles a year. If you drive more than what you’re allotted, you’re on the hook for excessive mileage fees that usually cost anywhere from a few cents to as much as $0.25 per mile driven over the cap.
A quick example: let’s say your lease agreement stipulates you won’t drive more than 15,000 miles a year. You end up driving 20,000 miles that first year, or 5,000 miles over the limit. Now let’s say the excessive mileage fee is $0.10 a mile. 5,000 multiplied by $0.10 is $500, which is the amount the leasing company will levy against you for that year.
Besides the mileage limitations, leasing also disallows any sort of modification from stock and requires you to return the car at the end of the lease with no more than what’s called “ordinary wear and tear.” This is a rather subjective aspect, to be sure. But if your car picks up more than its fair share of dings, dents, scratches, and bruises over the term of the lease expect to pay a penalty at the end of your lease.
You also have to return the car at the end of the lease contract, no exceptions. Early termination of the lease is almost always going to trigger some hefty fees. You’ll need to keep the car for the entirety of the lease to avoid these fees.
If you lease, you’re only paying to use the car, not buy it, and so the monthly payment becomes a lot lower than it would be were you bringing home the car indefinitely. You’re essentially paying only enough to cover the depreciation hit that kicks in as soon as a new car drives off the lot and continues for the term of the lease. This is why those advertised payments you see on television or hear on the radio are so tantalizingly cheap - because you only pay to use, not to keep. Choosing a car with a high residual value, which is the car’s estimated value at the end of the lease, can help keep costs down. That’s because most of the car payment is depreciation, so a lower depreciating vehicle can mean lower monthly payments.
You not only pay less money for a lease, you can also get a much nicer car for your money. To illustrate this, let’s say that hypothetically you’ve got $300 a month to spend on your car payment. If you were buying, your $300 payment could get you a new, base-model Hyundai Sonata, which stickers at $24,330 after all charges. Getting this Hyundai for $300 a month means putting down $4,500 and signing up for a 72-month financing term - just to be clear, that’s six years of paying $300 a month. These numbers assume you take Hyundai’s 2.9% financing rate and have a credit score of 700.
Now let’s consider what you can lease for $300 a month and $4,500 down. To keep things comparable, all of these lease prices were calculated using 12,000 mile yearly allowance and a 36-month lease term. Here’s a quick sampling of cars that would fit our hypothetical budget: Kia Telluride ($262/month); Acura TLX ($289/month); Volvo S60 ($279/month); Lexus IS300 ($319/month); Chevrolet Blazer ($289/month).
Granted, all those but the Telluride come in around $300/month because of special offers available for a limited time. But that’s the thing about leases: if you shop smart and scout out the deals, you can lease a nicer car than you can afford to purchase, regardless of your price point.
Oh, and if you were to lease that Hyundai instead of purchase it? $178/month with that same $4,500 down payment and credit score of 700. That’s $122 less per month than if you bought it outright. The significantly lower monthly payments are another major reason people might lease rather than buy.
Also, a word about credit scores: they are critical to your ability to get good financing, regardless of whether you purchase or lease. A credit score is a measure of your ability to pay your debts in a timely fashion. It’s affected by numerous factors that can’t be delved into here. But suffice to say that if you want to qualify for all the lease or finance deals you hear about, you’ll need as good a credit score as possible. If your score isn’t so hot, the financial repercussions of buying or leasing a new car could be significant.
An auto loan is much like any other loan: if you’re application looks good you’ll be granted the amount you applied for. You’ll pay that back with interest, which is denoted as APR - the annualized percentage rate. It’s the interest rate as annualized over the year for each year the loan is outstanding.
Once you have your loan, you’ll take the proceeds and pay the dealership for your new vehicle. At this point the owner of the car is the financial institution, not you. You won’t own the car until you pay back the loan in full, plus interest. The car is essentially collateral for the loan.
You’ll need to pay back whatever it is you were loaned over a stated duration of time, which is usually anywhere from 36 to 72 months. During that time the car continues to depreciate in value: your new ride quickly becomes a used car and the market values it as such.
If you stretch out your loan payments for too long - think back to the six-year financing term for that Hyundai we discussed - you run the risk of being underwater, which is when the market value of the car is less than the remaining balance on the loan. At that point you’re paying too much for a car that isn’t even yours.
Keeping a close eye on the interest rate accompanying your loan is also important. Even a half a percentage point can make a material difference in the total amount paid over the course of a loan. Getting saddled with a high interest rate can actually means you might ultimately pay more than the car stickered by the time you’ve repaid your loan.
Having a short term loan requires higher monthly payments, but also means no payments at all for some duration of time. Depending on your circumstances, this could be ideal over the endless payment cycle that comes with leasing.
That’s not the case when you buy a car; at some point the warranty will end and you’ll be on your own for repairs and maintenance that comes up. For the first few years of a car’s life, this isn’t an issue, but as it gets older it will need more upkeep and more regular maintenance. Expect to budget for unforeseen repair costs when the warranty runs out.
Because it’s yours outright, you also can take advantage of the resale value when it comes time to buy a new one. Even an older used car can be worth anywhere from a few thousand dollars to the price of some low-end new cars. Come trade-in time, you’ll reap the benefits of ownership when you see thousands of dollars lopped off the bottom-line price for your next car.
Gap insurance is something to consider as well. It covers the difference between the value of the car and the amount owed on it. If you total your new car when its still nearly new, the initial depreciation hit might mean the insurance payout won’t cover the amount you owe on it. Gap insurance covers the potential gap between what you owe and what the standard auto insurance pays out.
This insurance is a good idea for those getting loans but not usually required; however, it is often mandatory with leases. This is because even if your leased car is totaled you’re still on the hook for the payments; gap insurance insures you’ll have enough to pay what you contracted in a lump sum in the event the car is totaled.
On the other hand, if you put on serious mileage each year, want to customize your car, or plan on keeping it for years, purchasing is the better bet. Sure, you’ll spend more money per month on the payment, but at the end of the day you’ll have a car that’s yours to do as you please and trade in at will.
For all their differences, leasing and buying have at least this in common: they’re both complicated. The only way to know what’s right for you is to weigh both options, run the numbers, and do your research. Only then will you walk into the dealership confident and ready to negotiate a car lease or purchase price.
If you’re ready to start the car buying process, you can search over 4 million new and used cars with the iSeeCars.com search engine that helps shoppers find the best car deals by providing key insights and valuable resources, like the iSeeCars VIN check report.