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Is it Better to Buy or Lease a Car?
Currently, the percentage of buyers who choose to lease rather than buy has risen from 31% to 52% year-over-year, according to J.D. Power. However, just because more people are deciding to lease a car vs. buy a car doesn't mean that it's the right option for you too.
The truth of the matter is that there's no one-size-fits-all option for buying or leasing a car. So, it's critical to identify some cost factors, take a look at your personal preferences, and figure out your finances to help you decide which is right for you.
If you are looking for the most profitable or budget-friendly option, in the long run, buying a used car and keeping it after you pay for it is often the best option. But what if you prefer to have a vehicle with the latest technology or with more up-to-date safety features? Leasing can give you the financial freedom to get what you're looking for without going broke.
Choosing to lease a new vehicle rather than buy it comes down mainly to priorities. It's no secret that buying a car requires that you put down a large sum of cash upfront while also continuing to make payments for 48, 60, or even 84 months. And what's worse is that the car loses value as soon as it leaves the dealership, which means you may owe more money than it's worth for years.
Oren Weintraub, President of Authority Auto, says that when it comes to the question of leasing or buying a car, his answer is always to lease. However, let's break down the pros and cons of each option so you can better understand where you and your finances fit into the equation.
Comparison of Two Financial Options: Buy or Lease a Car
What happens when you buy a car using a regular loan? You borrow the cash from a bank or other lender and use it to pay for the car. Then, you make monthly payments to whoever you took the loan from until you're done paying off the loan amount (plus interest).
With this method, however, you're banking on the fact that you'll be able to get a loan at a low interest rate. If not, you'll be stuck making higher payments for a longer period of time.
Seeing as the average price of a brand new vehicle has topped $40,000, you're looking at quite a lengthy loan. Now, with a lease, you're still making monthly payments for driving a new car.
However, monthly payments for a car lease are often less than the cost of financing a new vehicle. The only real catch here is that, at the end of the lease, you have to return the car (meaning that you're never building real capital) and, if there is damage, you're financially responsible for it.
The Differences Between Leasing & Buying a Car
The most important thing to understand about the differences between buying or leasing a car is that:
- Buying a car is often more expensive in the long-run. However, when it's paid off, that's capital that you own and can leverage.
- Leasing a car is often the more budget-friendly option, but you're not building capital by paying a lease.
Let's break it down even further and look at a head-to-head comparison of the differences between buying and leasing a car.
Ownership
As mentioned, when you lease a car, it's never fully yours. You don't own the vehicle; you're basically renting it. When you buy a car, you own it and get to keep it for as long as you want. This means that if you want to customize it and upgrade a few features and then sell it to make a profit, you can!
Up-Front Costs
When leasing a car, you're liable to make the first month's payment, a refundable security deposit, an acquisition fee, a down payment, and all of the taxes and registration fees associated with acquiring the car. Costs for purchasing a car are pretty similar. You'll make a down payment (or the cash price for the car), plus all of the taxes and registration fees.
Monthly Payments
Regardless of whether you lease or buy a car, you'll be making monthly payments. According to Consumer Reports, loan payments are usually higher than lease payments because you're paying off the vehicle's total purchase price plus interest and other fees. With a lease payment, you're only paying to use the car, not to pay off the entire price.
Mileage
This is actually one very important factor to look at when deciding whether it's best to buy or lease a car! If you drive a lot, a lease probably won't make sense for you as most leases come with a mileage cap to avoid excessive wear and tear on the car. This limit is usually around 10,000 to 12,000 miles per year, meaning that leases are better options for those who only use their car for errands and short commutes.
Value
One of the most prominent arguments against buying a car is that "the value of a car depreciates as soon as you drive it off the lot." With a lease, that kind of depreciation never affects you. You'll end up turning the car in any way. While this is all true, you also have to also consider that you own that capital when you buy a car. This means that you can trade it in or sell it whenever you want and continue to build capital from that investment.
Damage, Repairs & Upgrades
Want to customize your car? You'll definitely want to buy it then, as those who lease a car aren't allowed to make any changes. Well, in some cases, you are. But you have to get rid of whatever you added before you return the car. When you buy the car outright, you can do whatever you want to it (keeping in mind that certain changes might void your warranty).
So, Should You Buy or Lease a Car?
As with any important financial decision, we suggest doing your research before making such a big investment. There's no "right" answer to the question of whether it's better to buy or lease a car. Really, the "right" answer depends on your financial situation, goals, and how you plan to use the car.
Buying a car is a better option for people looking to build capital over time. It's also great for those who want to own a car long-term. Leasing a car is a better option for those who don't drive too often and who don't want to lose money by investing in a car that'll depreciate in value.
Overall, it's also worth noting that leasing is often cheaper in the short term. But it is generally considered more expensive in the long term. Regardless of the option you choose, improving your credit score to access the best loan rates will help quite a bit.
Not sure what that has to do with anything or how to improve your score?
Download the Wealth Stack app for free on the App Store or on Google Play so that you can start learning through our helpful video courses just how to improve your score and why it's important to your financial health.
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