If you’re in the market for a new car or truck, you might be considering the option to lease and the option to buy. Unless you have enough cash available to purchase a new automobile outright, there are advantages and disadvantages to both choices and after you’ve considered your financial position, your decision should be easier than you think.
When searching for a new vehicle, you first should do your due diligence in looking for a deal online. eBay offers an excellent opportunity to buy new and used cars at a good price, and there are literally thousands of sites that can help you put a retail price on the automobile you are looking for. If you’ve drawn a blank, then it’s time to visit a dealership.
Whether you’re anti-lease or anti-buy, it’s important to know the pros and cons of both sides to better understand the effect of your decision. Is leasing a car cheaper in the short term, but more expensive in the long term? Does financing a new car affect your credit score negatively? Both very valid questions that I hope to explain below.
Leasing is still a very popular method of obtaining a new car or truck for consumers, and you might notice just as many commercials devoted to leasing as there are for buying new automobiles. Why would you lease a new car instead of buying it?
- Lower Monthly Payments – When you lease an automobile, you usually do so for a specific period of time. An average lease is for 36 months, and you can generally expect to pay 60% of the purchase price within this time frame, all things considered. This means that your monthly leasing payments are considerably less than if you decided to buy, which frees up money for other areas of your budget
- Lower Down Payment – If you don’t have a lot of cash on hand, then buying a new can be quite the challenge if you don’t have excellent credit. A sizable down payment is generally required, and sales tax can send you over the top. As far as leasing is concerned, you can get away with a small down payment and you’ll only pay sales tax on the portion of the car that you pay for (again, around 60%).
- Maintenance is a Breeze – Most manufacture’s warranties cover the lease terms of your automobile, so any problems with your car can be fixed at the dealership without any headaches. If you choose to buy, you will be given the same warranty but it won’t last forever. Finding a trustworthy mechanic can be quite the challenge and future car repairs could cost thousands.
- You Drive in Style – Leasing a car every three years means you are always driving what’s new. Never having to ride in a clunker keeps you in the cool crowd.
- Negotiating a Lease is Easier – If you understand certain industry terms like Money Factor, Capitalized Cost and Residual Value, negotiating your lease can save you hundreds if not thousands. When buying a new car, it can be difficult to negotiate a lower price because you’re cutting into a dealer’s commissions. Ouch
Even though there are good reasons to lease a car, you can bet I’ve got some good ones for buying, too.
- Owning an Asset – Monthly payments you make are going toward the purchase of an asset, not simply the rental of one, so once you have completed the terms of your financing agreement, the car or truck is yours to keep.
- You Can Customize – When buying, you are free to change anything you don’t like about your car without repercussion.
- 36,000 Miles and Counting – One of the biggest fees that leasers get hit with when returning their car is going over their allotted mileage. A general lease allows for 12,000 miles a year, but if you are a smart leaser, that too can be negotiated. If you buy your new automobile, you can drive it until the tires fall off.
- Car Insurance – If you are in an accident, your car insurance provider will pay the owner of the vehicle, which is your leasing company. Often times in leases, a cars value is more to the leasing company than the insurer will pay for, and the leaser of the vehicle is on the hook. GAP coverage is necessary when leasing to avoid this problem, but when buying a car, this is unnecessary.
- Fixing Only What You Want To Fix – Every little ding and scratch can cost you when leasing a car, but when you buy, it’s up to you whether or not you want to keep the car in that condition. Anyone who turns their car in after leasing in “non-perfect” condition is risking a financial misstep.
Suze Orman, one of the most well known names in personal finance says that the worst decision she ever made, financially speaking, was to lease a 1987 BMW to impress her “love interest”. Leasing certainly isn’t for everyone, but it might be the right decision if you simply can’t afford the high monthly payments that financing has to offer. You may also want to consider finding a car with a cheaper monthly payment.
Published or updated March 1, 2010.