Buying a new vehicle is a huge decision. It is important to do your research so that you know exactly what you are getting in to and what works best for your situation. If you are in the market for a new car then invariably you have come across the dilemma of whether to buy a car and finance it, or simply lease it. This article will discuss the pros and cons of both in order to provide you with the best tools to make the best decision for your situation.
Taking out a loan and making loan payments every month is the traditional way people have purchased cars in the past. If you plan on keeping your car for a long time and not upgrading anytime soon, then buying may be the perfect option for you!
- Once you pay off your loan, or buy it outright, then the car is yours. Besides routine maintenance, you don’t have to worry about a continual monthly car payment.
- Since you own the vehicle, you are not bound by the restrictions that leases put on you, such as the mileage limits, maintenance requirements, or restrictions on modifications that most leases have.
- Owning a vehicle means you have equity. If your loan payments outpaced the depreciation value of the car then you have positive equity in the car, and you may be able to recoup some of the costs when you go to sell or trade-in your car later.
- Since you are buying the car to own, you are at the mercy of the market in terms of value depreciation.
- Cars can depreciate very quickly and if you are stuck with a long term loan then you may find that your car is not worth nearly as much as you have paid for it when it comes time to sell or trade-in.
- Most financing requires a sizable down payment. Most loans usually require 10-20% up front, which can be hard for many people to save up for, especially if the vehicle is an emergency replacement.
Leasing is similar to financing via a loan with some very important differences. When purchasing a new vehicle outright, you are responsible for providing a down payment and financing the difference through a loan. When leasing, you are not financing the full price of the car, but merely the difference between the full price and its depreciated value after the term of the lease. For example, say your dream car costs $30,000. After the lease term (usually 3 years), its value has depreciated by, for example, 45% or $13,500. The vehicle’s value after three years is now only $16,500. This depreciated value is called its “Residual value.” With a lease you would essentially only be financing the difference in value for the three years you are using it. In our example this would be just $13,500, instead of the full cost of the vehicle ($30,000). This means that unless you provide a large down payment down, or have a very good trade-in, your monthly payment for a lease will be much more affordable than a loan payment for the same vehicle.
Benefits of leasing
- Typically, a much more affordable monthly payment than a loan for the same vehicle.
- No need for a large down payment.
- Gives you the opportunity to fully replace your car every lease term for the latest and greatest in new technology and safety features.
- Most manufacturer warranties last 3 years, the average lease term, so minus routine maintenance (oil changes, tire rotations, etc.) you don’t have to worry about repairs on your lease.
- Leases have limitations on them such as mileage limits, fees for excess wear and tear, and modification restrictions. For most people these limitations are minor, but if you plan on driving long distances, or making serious modifications to your car,leasing may limit you.
- Since you don’t own the car you don’t have equity in the vehicle. Once your lease is up ownership reverts back to the dealer.
- Most leases have various fees that one needs to be aware of and can impact how much you end up paying for the vehicle.
As you can see, both options have their pros and cons that each buyer should consider before making a decision. Buying is certainly well and good, but if you are looking to get a new car with a minimal down payment, predictable monthly payments, and the ability to have the latest and greatest car every few years then you should consider a lease and what it can do for you.