Leasing 101: Should I Buy or Lease a New Car?

One of the most common questions that arises when it’s time to get a new car — at least for those of us who don’t have wealthy benefactors or tens of thousands of dollars in the bank — is how to finance it.

There are two choices, buying (with a loan) or leasing, and each has advantages and disadvantages that you need to understand in order to make the best choice.

Benefits of Buying

One of the biggest advantages of buying a car is that it’s less expensive over the long term than leasing. The longer that term is, the bigger the financial advantage of buying, if only because the purchase price is spread over more months of service. Buying is also less expensive because of the way lease payments are structured, as you’ll see in the next section.

In addition, at some point the car will be paid for and you will be driving it for “free.” You’ll still be liable for maintenance and, as the car ages, repair costs, but those monthly loan payments will be a thing of the past. If you’re the kind of person who drives a car into the ground before replacing it, buying is for you.

Another advantage of buying is that you own the car and, by extension, can do whatever you want with it. Where a leased car has to be maintained and insured according to the lease’s requirements, can only be driven a limited number of miles, and cannot be modified, none of these restrictions apply to a purchased vehicle.Want to install custom wheels or an aftermarket sound system? Go for it. Got a new job and need to drive twice as many miles a year as you thought when you bought the car? No problem. Your teenager just got his or her driver’s license and scraped up the side of the family car? If you don’t care how it looks, feel free to ignore it.

There are other, less tangible benefits to buying, including pride of ownership. Don’t discount this or think it’s not important just because it’s not financial. If it makes you happy, it has value.

Benefits of Leasing

While buying a car is cheaper over the long term, leasing is less expensive in the short term. That’s because, when you lease a car, you’re only paying for part of its total value — specifically, the amount it will depreciate over the term of the lease (which is typically two to four years). This translates into lower monthly payments, and automakers often offer special deals to make these payments even lower.

Alternately, you can take advantage of these lower monthly payments to lease a more expensive vehicle than you might otherwise be able to afford. So instead of buying a compact hatchback, you might be able to lease a larger sedan — or, if it’s your thing, step up to a luxury car.

Another advantage of leasing is that, once the lease term is over, you have the option of simply giving back the car and leasing a new one. This way, you can enjoy the benefits of getting a new car every few years, such as having the latest advancements in safety, comfort, and performance, as well as the security of a new-car warranty.

Deciding Which is Right for You

Deciding whether to lease or buy your next car is as much about potential cons as it is pros. For example, leasing places several potentially important restrictions on your use of the car. One of the most significant ones is the limited number of miles you can drive the car during the lease term. A typical lease allows 10,000 to 12,000 miles per year, and if you end up driving 15,000 miles a year you’ll be on the hook to pay for those extra miles when the lease is over — to the tune of $0.10-0.25 (or more) per mile. On the other hand, while it won’t have a negative effect on your bank account at the end of the lease, if you only drive 6,000 miles a year you’ll have paid for many thousands of miles you didn’t use.

Another potential concern is having to pay for what the leasing company calls “excessive” wear and tear, which can include scratches in the paint, stains on the carpet, and chipped or cracked glass. In addition, the lease will contain a stipulation about how worn the tires can be, which might force you to buy new tires for a car you’ll only drive for another month.

Yet another possible concern about leasing is its lack of flexibility. If you have to get rid of the car before the lease term is over, you’ll likely have to pay a very steep penalty. So if you think you might lose your job, or expect to move to a city where you won’t need a car at all, leasing is probably not the right choice.

While these may sound like a lot of reasons to be avoid a lease, it’s important to know that most people have positive experiences; that’s why 30 to 70 percent of new cars are leased. Besides, there are also potential disadvantages to buying.

If you end up selling the car within the first few years of ownership, you’ll take a bigger financial hit than if you had leased the car for a full term. Most new-car warranties end, or offer less coverage, after four or five years, so at that point you’ll be responsible for repair costs as long as you own the car. If you are unlucky enough to be in a serious accident, your car’s value will suffer even if everything is repaired fully.

 

As you can see, there are significant differences between buying and leasing, and you need to choose carefully based on your circumstances. There’s no universal correct choice, only what’s right for you.