To buy or to lease, which is better? When it comes to cars, the answer depends a lot on your situation. Factors such as your age, the distance you regularly travel by car, and where you live, (to name a few) help determine what’s best for you.
But first, it helps to know what the difference really is between car buying and car leasing. Read on to find out, and to see what questions to ask to decide which is the best option for you.
The Difference Between Buying and Leasing a Car
The immediate difference between buying and leasing a car is simple. When you buy a car, it’s yours forever. When you lease one, you’re essentially renting it for a set period of time for a fixed monthly price, though you’ll have an opportunity to buy the car at the end of the lease period.
However, there are similarities in the two options as well:
How Buying and Leasing a Car Are Similar
- You get to take a car home on the same day.
If your paperwork and financing go through, you can drive out of the dealership in the new (or new to you) car on the same day.
- Interest charges mean paying more than you think.
Whether buying or leasing, the dealer will urge you to focus on the monthly payments (especially the “affordability” of the monthly payments). But if you calculate how much you’re paying in interest charges each month, you’ll see how much money is going to you just being able to finance the car. Sticker price is never what you pay unless you pay it all in full at once.
- Missing a payment could lead to repossession.
Even if you buy a car, you don’t own it unless and until you pay it in full, which can take nearly six years depending on the type of loan you take out. That means it can be repossessed at any time if you miss monthly payments. Whether buying or leasing, it’s important to pay on time.
- Hidden fees and extra costs can add up.
When it comes to financing, both buying and leasing can lead to hidden or unexpected fees. Carefully review all the paperwork before you sign and be prepared to walk if the extra fees get out of hand.
How Buying and Leasing a Car Differ
- If you buy, you can modify.
Even though you don’t officially own a car until you’ve paid it off, since you’re working towards ownership, the car is yours to modify as you please and to drive as much as you want.
On a lease, however, it’s not so simple. Eventually, you will have to return the car to the dealer. That means you can’t make any modifications to the car unless they can be reversed without incurring damage to the car.
- Leasing means following strict usage and maintenance rules.
Along the lines of what a dealer will do with the car when your lease is up, they’re going to lay out some pretty strict rules for how you can use the car. You’ll be mandated to follow a maintenance checklist (the cost of which may or may not be included in the lease), stay within a certain amount of miles each year (or else you’ll be charged for every mile over your limit on the odometer at the end of the lease), and, again, avoid modification
To not follow these rules means you’ll pay serious fees when it’s time to turn the car in.
- Your payments on a lease don’t mean you’ll eventually own the car.
While both purchased cars and leased cars can come with monthly payments, in some ways, the monthly payments on a purchased car are more productive. That’s because they are intended to lead to eventual repayment of the balance you owe on the car loan.
Since a lease’s payments aren’t set up to pay off a principal balance, and since it’s really a rental, the payments are more to maintain your temporary possession of the car. That said, you can ask your dealer about the option to buy out your lease at any time.
- Getting out of a lease is hard to do (financially, that is).
If you want out of a car loan, you have options like selling the car (if you can get more than what you owe on the loan), trading it in to the dealer, and even refinancing. But if you want out of a lease, you could incur early termination fees.
However, you could try to use a lease-trading website in an attempt to avoid these heavy costs.
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Buying vs. Leasing a Car: What’s the Best Option?
As you can see, the differences can simply be put down to the difference between buying and renting anything — except for the fact that car leases can come with quite a few extra fees and usage requirements. (See this glossary from Consumer Reports to learn exactly all that can be involved in a lease). But what helps people choose one option over the other?
A couple of popular reasons people choose to lease a car are because they either love the idea of having a new car every few years or they want to get into a car they wouldn’t be able to afford as a purchase. Leases can also be easier on your tax costs, as you only have to pay taxes on your monthly payments rather than the price of the car in total. Plus, leases being used for business purposes can sometimes be tax deductible.
Popular reasons for buying a car include the need to use the car more than a lease will allow or because the buyer doesn’t want to be stuck in a perpetual monthly payment cycle.
As for you, ask yourself these questions before you decide:
- Can I stay within the maximum mileage allowed on the lease I’m interested in?
- Am I okay with the idea of not being allowed to modify the car?
- How do I feel about always having a monthly payment on a car as long as I lease?
- Can I afford the car I want on a purchase? What’s the cost of the car I want on a lease? (You can use this calculator to see just how much that lease will cost.)
- What’s more to my liking: getting a new car on the regular or not having to make payments after the loan is paid in full?
There’s no right or wrong answer as long as you choose the option that fits best with your lifestyle. Just make sure you run all the costs of purchasing the car you want versus leasing it so you really know what you’re getting into.
Ready to buy or lease your dream car? Read this to get your credit ready.