The choice between leasing or buying can be a tough decision. Weighing the pros and cons always helps in the decision-making process. In the end, much of your answer will come down to your preferences and the bottom-line cost.
As with most things, there is no “one size fits all” answer since both leasing and buying have numerous advantages and disadvantages. Hopefully, after reading this post, you will walk away with an in-depth understanding of your options.
Lease vs. Buy
When purchasing a car, you typically take out a loan and build equity with each payment. Each payment consists of a certain amount that goes toward principal and interest. Once you make the last payment, you own the car outright.
Naturally, you are responsible for the upkeep and maintenance of the vehicle for as long as you own it but can drive it until you’re ready to buy another one and potentially use it as a trade-in or a hand-me-down for another family member.
Leasing a vehicle, on the other hand, is a bit different. Instead of a loan, your lease agreement spells out the specific terms of the contract. Lease payments tend to be less than auto loans, as you do not have any ownership and are required to return the vehicle at the end of the term.
Leasing, however, allows you to keep up with the ever-changing technology features since you will be in a new car every few years.
The Pros and Cons of Leasing a Vehicle
Leasing a car tends to be most suited for those who desire a new car every few years and drive no more than 10,000 to 15,000 miles yearly.
Below are some pros and cons to consider when thinking about leasing a car:
Pros
Your monthly payments tend to be lower.
You return the car at the end with no long-term commitment.
You get to drive a new car every few years.
Most of your maintenance is paid for.
You end up driving a car during its most trouble-free years.
Cons
You could be charged for excess wear and tear if you don’t take proper care of the vehicle.
You may have to pay an excess-mileage penalty if you exceed the stated mileage limit.
Fees and penalties likely apply if you try to return the vehicle before the lease expires.
You must return the vehicle in showroom condition with very few exceptions.
In addition, business owners could be eligible to deduct certain operating and leasing costs tied to the business use of the leased car.
The Pros and Cons of Buying a Vehicle
Buying a car is a straightforward process best suited for those who prefer to hold on to their cars for the long term and tend to drive a lot. The main decision boils down to whether you buy the car outright or finance it.
Below are some of the more important pros and cons of purchasing a vehicle:
Pros
At the end of a set period, the vehicle is yours outright.
Your monthly cash flow will increase once you pay off the car loan.
You can drive the car as many miles as you like each year.
You can customize the car’s interior and exterior as you desire.
Cons
The monthly cost is usually higher than a vehicle you lease.
You are completely responsible for upkeep and repair.
It can affect your credit score if you default on your loan.
You own a depreciating asset that generally loses 11% of the value the minute it’s driven off the lot.
Owning a car does offer one major distinct advantage. Ownership provides more breathing room and flexibility. Unlike those who continually lease, once your vehicle is paid off, you can redirect the monthly cash flow toward your other financial goals and even enjoy some of it!
Of course, you should plan for the upkeep costs that come with car ownership, such as new tires, brake pad replacement, and engine maintenance.
Which Option Should You Choose?
Many people have a tough time choosing between a lease and a purchase. Your decision depends highly on your lifestyle habits and financial budget. If you love the idea of having a new car every three years— which is a typical lease period—and don’t mind a monthly payment, you should consider leasing.
On the other hand, buying might be your best option if you prefer the flexibility of driving as much as you like and knowing that the car will be yours outright at a certain point. Bottom line, you never have to return the vehicle and can keep it for as long as you like!
Another point to keep in mind is that with a lease, your monthly payments will likely be lower—but you may be required to provide a bigger down payment at the beginning and a lump-sum payment at the end. If you choose two back-to-back, three-year leases, you might end up paying more money after those six years than someone who takes out loan payments and pays off the car in six years.
This is why it is crucial to know what you’re signing—you need to know exactly how much money each option would cost you when all is said and done.
One other thing to consider is what transpired during much of the pandemic. While events like this thankfully don’t occur regularly, the entire supply chain was upended, making it extremely difficult to obtain a new car in a timely manner. New-vehicle inventory was extremely low, which meant those with expiring leases had to settle for a new car that likely did not match their desired specifications.
Conclusion
The bottom line is, that with a lease, you can walk away from the vehicle at the end of the lease term. You can’t do that when you purchase a car, as you are on the hook until it is paid off. Leasing is a good way to “test out” a vehicle or brand to see if you like it.
With a loan, that option gets taken off the table. While leasing a vehicle has become increasingly popular in recent years, that doesn’t mean it is for everyone. If you know you want a certain vehicle and you know you want to own it at some point, a purchase is always better than a lease.
Of course, in the end, you are the one who will make the financial decision whether to lease or buy! You’ll just have to consider the advantages most important to you and base your decision on those things so you can feel comfortable with your decision. Incorporating this decision into your financial plan will assist in the decision-making process, as you can assess its impact on your financial goals.
Discuss your situation with a fee-only financial advisor.
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