Shopping for your next new car can be exciting, but it can also be an overwhelming process. There are many choices to be made and many questions to answer. One of those questions is: Should I buy the vehicle or should I lease it?
Every new car buyer has to weigh the pros and cons of leasing vs. buying, and they have to decide which is right for them. So, to help with that decision, we’ll examine the advantages and disadvantage of leasing vs. buying a car. We’ll cover some of the terms and language you should be familiar with when making this important decision, and we’ll discuss the financial realities of each.
Any Car Can Be Leased
Many car buyers think leasing is only for expensive luxury vehicles like BMWs and Mercedes. But the truth is, you can lease any car, truck, or SUV.
This year, about 30 percent of all vehicles sold are leased, but for some brands, that number is higher. Over 50 percent of cars sold by a long list of makes are leased. These brands include Chevrolet, Volkswagen, Lexus, Mercedes, Volvo, BMW, and Jeep.
The Fundamentals of Buying a Car
Your two main options when buying a new car are leasing or buying. Both usually require a car loan, which you agree to pay back in monthly installments, however, some buyers do choose to pay the entire cost of the car up front, essentially paying cash for the vehicle, including all taxes and fees.
Most people choose to finance the purchase of a vehicle and the duration of these loans usually range from between 36 and 72 months. Remember, the longer the term or duration of the loan, the lower your monthly payments. However, always take a few minutes and evaluate the total cost of the loan.
Depending on the finance rate, a shorter loan may cost you a little more a month, but considerably less overall, after you eventually pay the loan back in full, including interest at an agreed upon Annual Percentage Rate or APR. Sometimes a longer loan will cost less overall, so it's important to do the math. If you’ve agreed to buy the vehicle, you keep possession of the car at the completion of the terms of the auto loan. You now own the car and its remaining value.
Leasing is a rental agreement between you and the finance company loaning you the money to lease the vehicle. You, the lessee, only pays for the portion of the vehicle used over the term of the lease. At the end of that term, the vehicle is usually returned to the dealership.
If you want to keep the vehicle, a leased car or truck can be purchased by a third party or by the lessee at any time at a determined buyout price, which is the total of the remaining payments plus the residual value of the vehicle. That buyout value can also be financed with another car loan, but it’s rare that such a loan would be financially beneficial.
Car Buying Terms You Should Know
When you go shopping for a new car or if you decide to use an online car loan calculator to determine how much you can afford to pay for a car, it’s important that you understand the language of car finance. Here are five common car shopping terms and their definitions that apply to buying or leasing. For other terms and definitions, check out our Car Shoppers Glossary.
Down Payment: This is any cash you pay upfront to reduce your monthly payments and the overall size of a car loan. Often $0 down payments are advertised, but eligibility always depends on your credit rating. Usually buyers with low credit scores are required to make a sizable down payment whether they’re leasing or buying a vehicle. This is commonly referred to as a “down”.
Drive Off: Sometimes this is called Total Due at Signing. It’s the total amount of money a buyer or lessee must pay to take possession of the vehicle and drive it off the lot. If you’re leasing, the drive off usually includes the down payment, first month’s payment, doc fee, acquisition fee, sales tax, and title. If you’re buying the vehicle, the total amount will include your down payment, doc fee, sales tax, and title.
Car Leasing Terms You Should Know
There are also many terms you should understand that only apply to a lease. Here are four essential leasing terms and their definitions:
Closed-End Lease: This is the most common type of new car lease. When leasing a car, you agree to a duration, or term, of that lease. Most terms are for 36 months. However, 24-month and 48-month leases are also popular. At the end of that time, you have the option to return the vehicle to the dealership without further liability or cost, or you can buy the vehicle for a predetermined amount.
Early Termination Fee: If you decide to end a lease early for any reason, you’ll often be charged this large penalty fee, usually hundreds of dollars. You may also be required to pay the full amount of the remaining monthly payments. Most leases can be transferred, so many lessees find someone to take over their lease to avoid these costs.
Excess Wear Charge: When a car is returned to the dealer at the end of a lease, it will be inspected for damage, wear, and mileage determined to be beyond the norm. Usually, you’ll receive a bill charging you for things like paint damage, dents, and scraped wheels.
Residual Value: This is the predicted value of any leased car or Truck at the end of the lease. It’s a data-based prediction used by the industry to determine the overall cost of any vehicle lease. If a $45,000 car is predicted to be worth $30,000 at the end of a three-year lease, then its residual value is $30,000. Leases on cars with higher residual values are usually less expensive because the automaker can sell it as a used car to the next owner for more money after your lease is complete. What can make residual value confusing is that it’s always displayed as a percentage (i.e. 55 percent).
The Advantages of Buying a Car
Buying a new car or Truck has many advantages over leasing. The most important is that you’ll keep and own the car at the end of the loan term, usually 60-72 months, and you’ll be able to continue driving it without any additional cost or monthly payments.
Of course, once you own the vehicle, you also own its value, and that value can be applied to your next new car purchase. When that time comes, you can either sell the car or trade it in at the dealership.
Unlimited Mileage and Modifications
Unlike leasing, a purchased vehicle can be driven as many miles as you would like without being hit with excess wear charges. You own the car, and there are no mileage limits. Usually, a standard new car lease will limit your average annual mileage to between 10,000 and 12,000 miles. However, there are higher mileage leases available at additional cost. In any case, if you go over the agreed mileage maximum, you’ll be charged for the additional miles, usually $.20 per mile.
Another advantage of buying a car is that it also allows you to modify or personalize its appearance and performance if you wish. If you modify a leased vehicle, you’ll probably be asked to pay penalty fees upon its return. Often excess wear charges will be added for modifications like lowered suspensions, aftermarket wheels, and tinted windows.
The Advantages of Leasing a Car
Leasing a car or Truck also has its advantages, especially if you drive less than 12,000 miles a year. Leasing a vehicle with a low mileage cap will often drive down the cost of the monthly payments compared to a traditional car loan. This may allow you to afford additional features, like a sunroof, or possibly a fancier vehicle from a luxury brand like Lexus or Cadillac.
Because most leases only last three to four years, many consumers like the fact that they will never own an older, high mileage vehicle. They’ll never have to deal with the hassle and expense of repairing an aging car or truck, and because most new car warranty’s last 36 months, they’ll never be financially responsible for any repairs or issues with the vehicle.
The Advantages of Leasing a Car, Part II
Many consumers also lease because they like the idea of getting a new car every three or four years with the latest safety, features and technology. Of course, there’s also a downside to jumping from lease to lease every three years, it means you’ll always have a car payment and never own the remaining value of the vehicle.
For some, like small business owners, self-employed individuals and many other consumers there are also tax benefits to leasing a car over buying. Savvy businesses know that they’re allowed to deduct lease payments as an expense. Consumers should also go online and learn about their state’s tax laws. Most states charge you less sales tax if you lease.
Choosing to lease or buy your next new car is a matter or personal preference, as well as your current financial and lifestyle situations. Be sure to consider each of these factors carefully when comparing the advantages and disadvantages of leasing versus buying your next car. Hopefully this information will help you make the right decision for you and your family.