August 22, 2019

Cars: Leasing vs. Buying

Getting ahold of your first new car is undeniably exciting. It’s also a big purchase and a serious commitment. In all likelihood, you won’t be able to buy the vehicle outright with the cash you have on hand, meaning you have two choices as for how to pay for it – financing or leasing. For many people, financing has historically been the more common choice as opposed to leasing, but in this day and age, the decision may not be quite as clear-cut. Let’s look at the ins and outs of both possibilities and see what makes the most sense for your unique situation:

THE LOWDOWN ON LEASING

You never own the car as a lessee, but rather pay for the privilege of keeping and driving it. Payments are in monthly installments under almost all circumstances, and at the end of the lease term (usually two or three years), you return the vehicle to its dealership.

The main advantage brought up by lease proponents is the monthly payments, which are lower than almost anything you’d get in a financing agreement for a vehicle of comparable make and dollar value. If you’re a car enthusiast that likes to keep up with the latest makes and models, leasing can be a great way to stay current without taking on the bulk of a vehicle’s depreciation costs. If you’re also only planning to have your next vehicle for a short time (for any reason), leasing may be ideal. Tread carefully though — early termination fees can be incredibly costly if you find out need to get rid of the leased vehicle before your lease expires.

FINANCING 411

If you’ve had a mortgage, or understand how it works, an auto financing agreement is not much different: You pay with a combination of a down payment, a loan from a traditional lending institution and any value gleaned from a vehicle you trade in (or some combination thereof). Said down payment is almost always greater than anything associated with a lease, as are the monthly installments, and then there’s the interest rate to consider. That said, once you pay off the financing plan, you own the vehicle free and clear. When electing to finance a car, you should be in a stable financial position that will ensure you can meet your monthly payments. The main advantages of financing are that you essentially own equity in the vehicle, and will be able to sell it at a future time of your choosing. You’re also not limited by mileage caps or rules against customization, but be conscientious about how this may alter the cash value of the vehicle down the line.

MAKING YOUR DECISION

The ownership factor is the key advantage on financing’s side of the ledger. For anyone who plans to hold onto their vehicle for the long haul, that’s the be-all, end-all, and understandably so, as it guarantees the investment’s value for the not-too-distant future. It also allows you to maintain more liquid capital than an outright purchase would, freeing up some disposable income for other uses.

On the other hand, leasing also keeps your cash outflow lower with smaller monthly payments and less upkeep expenses. You won’t own any of the cash value that the car maintains, but this isn’t necessarily a bad thing due to the generally rapid depreciation of consumer vehicles (especially if purchased new). Be mindful that most leases also have mileage caps ranging from 12,000 to 15,000 miles per year, and dealers will charge you for exceeding them, so a lease may not be a viable option if you have to drive a lot. Leases also have other strict rules that don’t come with a financing deal.

Consumer Reports noted that leasing has become more popular in recent years with buyers leasing a broader range of vehicles at near-zero interest rates. Ultimately, you’re the only one who can make this choice, but it seems clear that leases are reasonable for short-term needs when you’re on a budget, while financing is best if you know you’ll need one car for at least five or more years.