Lease or Buy? Make the right choice for the right wheels When it comes to a new set of wheels, one of the most important decisions you’ll make is whether to lease it or buy it. A lot of people misunderstand the differences between leasing and buying. We’re going to clear up all the confusion in this article. The big difference To really understand the difference between leasing and buying, imagine that your car has an extra dial on the dash. It looks just like the fuel gauge, but instead of it going from Full to Empty, this dial goes from the value of the car when you buy it, to zero. It represents the entire lifespan of the vehicle. As you use the car and put more and more miles on it, that dial starts to go down. In finance terms, this is called depreciation. Everything you buy depreciates, or loses value over time. And cars are no exception. When you buy a car outright, even if it’s with a loan from the dealership or a bank, you’re paying for the car’s entire lifespan. You can use the car up completely until its value reaches zero. When you lease, you’re only paying for the portion of the dial you use up. At the end of the lease’s term, or length, you give the car back to the dealer. Some people confuse leasing with renting, but the two are completely different. When you rent a car, you’re just borrowing it. But when you lease, you’re paying for how much value the car loses over the time you have it. Buying vs. Leasing Buying a car is an investment. It’s just one that loses value instead of gaining. But despite the fact that, as soon as you drive a new car of the lot, it starts losing value, you can still trade it in or sell it at a later date and recoup-- or get back-- some of what you spent. Besides having the ability to sell your car in the future, another advantage of buying is that it costs less in the long run. Typically, your monthly payments on a car loan are more expensive than monthly lease payments. However, if you plan on keeping the car at the end of your lease’s term (most leases offer you the option to buy), you’ll pay much more for it than you would have if you had bought it in the first place.
Finally, when you buy a car, there aren’t any restrictions placed on how much you use it. Leases, on the other hand, specify how many miles you’re allowed to put on it. If you go over, you’ll have to pay for each mile you drive it. Just like when you go over your cell plan’s minutes for the month, it’s super expensive.
Leasing has advantages of its own, however. For one, your monthly payments are lower, typically 30-60% lower than what you’ll pay per month on a car loan with the same downpayment. If money’s tight each month, leasing is a better bet to keep you on budget. Just remember that leasing costs more over the long run, especially if you decide later to keep the car you’ve been leasing. Another advantage of leasing is that you don’t have to pay for routine maintenance. That’s all built into the payments you make as that imaginary dial starts to move. Lastly, if you like the idea of getting a new set of wheels every 2 to 3 years, then leasing makes a lot of sense. Pros and Cons Still having trouble choosing between leasing or buying a car? Maybe this chart will help.
I need low monthly payments I drive a lot and the number of miles I put on my car varies from month-to-month. I’d like to have a new car every 2 or 3 years with the latest features.
I plan on having my car for a while and would like to eventually be payment-free.
I’d like to build some equity and be able to sell my car for cash if I need it.
I don’t want to worry about paying for maintenance after my car’s warranty expires
Leasing costs less month-to-month. Leases have restrictions on how many miles you can put on a car. When you buy, the car is yours to drive as much as you need to. Once your lease is up, you return the car and can get something newer. If you buy, you’ll have to sell your car or trade it in. Pay off your loan, and the car is yours forever, without any monthly payments. Buying a car is an investment. You can trade it in and apply its value towards a newer car or sell it on your own and pocket the cash. A leased car is covered by warranty for the term of the lease. Once a warranty expires on a car you’ve bought, you have to pay for all maintenance.
Here’s another way to think about leasing vs. buying, based on whether your concerns and goals are short, medium, or long-term: SHORT TERM (under 2 years): The short term costs of leasing a car are always less than buying. MEDIUM TERM (2 to 5 years): The medium term costs are about the same, whether you lease or buy, assuming that you plan on selling or trading in the car you bought when you’re ready for a new one. LONG TERM (5 years +): The long term costs of buying are always less than leasing. Once you’ve paid off your car, you’re in the clear. If you lease, you’ll always have a monthly payment to make. It all comes down to making the best choice based on your lifestyle and your needs. Choose wisely and you’ll get the most out of every dollar you spend on a new ride
Published on Jan 19, 2012
When you lease, you’re only paying for the portion of the dial you use up. At the end of the lease’s term, or length, you give the car back...