The New Car Buyer's Guide
There are many misconceptions around the decision whether to buy or lease that new car you've been thinking about. In order to feel confident about your decision, you need to thoroughly understand the benefits, costs, and risks of leasing versus buying a new vehicle.
Everyone buys a new car for different reasons, but what is the most important aspect of the decision to you? Do you want to treat the car as an investment that will retain equity throughout the years? Is actually owning the vehicle truly important to you?
Or maybe sporting a brand new car every few years is more your style, rolling in a new make and model at the end of each contract period. Numerous factors, such as monthly payment rates, equity, mileage, and maintenance costs can all play into your decision making.
When you buy a new car it becomes your personal property to do with as you see fit. Treat it like an investment - whether that means selling the car whenever you please or modifying the car to your liking. When you lease you are paying down the depreciation of the vehicle to the dealer during the allotted contract period.
THE DIFFERENCE IN CAR PAYMENTS WHEN YOU BUY OR LEASE
Cost is usually a primary consideration when it comes to the decision to lease or buy. Naturally, there are drawbacks and benefits to both sides. Purchasing a new car requires a large down payment followed by a loan that you must make monthly payments on until the car is fully paid off.
Because of the higher upfront costs associated with purchasing a new car, leasing can seem like the more affordable option, but keep in mind that buying a car works will build equity over time. At the end of the loan repayment period (which is generally between 60-72 months) the car is an asset with equity value and can be resold.
However, a car lease is almost always cheaper on a monthly basis than loan payments. A less expensive monthly payment is attractive to many, but leasing a car doesnâ€™t build any equity over the long run. On the other hand, some lease contracts will allow for the leased vehicle to be bought out, with the lease payments going toward the principal. You can have your cake and eat it to!
BUYING VERSUS LEASING - DOES BUILDING EQUITY MATTER TO YOU?
What is equity? Simply defined, equity is the total value of an asset. When you buy a car, it becomes one of your assets. Should you choose to sell it down the road, you generally earn some of what you originally paid for the car - your return on the investment, so to speak. So, not only do you get the use of the car over time, but you also have an asset worth something should you choose to sell.
On the other hand, if you lease a car, you're turning it in at the end of your lease period. There is no monetary return on your investment at that time. For a lot of people, that's ok - the time spent driving a newer car is exactly what they wanted. Getting into a new car every few years is a compelling reason to lease. After all, it can be hard to beat that new car smell and the excitement of driving the latest model.
So while leasing does not build equity in the monetary sense, it does offer all the perks of driving a new car without the commitments that come with buying. Leasing is also generally more flexible. For example, if you need to back out of the lease there are some leases that can be broken without a lot fees or penalties. And at the end of your lease if you absolutely love the car and decide you want to it, taking ownership is usually as easy as paying the residual cost of the vehicle to the dealer.
MILEAGE LIMITS, DEPRECIATION, AND YOU
Another important factor to consider in the buy vs lease debate is just how far you plan on driving. Most leases put a cap on the number of miles you're allowed to drive annually. Leases are priced to account for the depreciation of the car's value over time, and the more miles a car has on it, the less it's generally worth. As such, most leases limit annual mileage to somewhere between 12,000 and 15,000 miles.
If you have a shorter commute and don't plan on taking many long road trips, leasing can be a great option. However, if you think you may exceed this limit, even by a small amount, it's worth considering buying instead. For most leases, you can expect to pay somewhere between $0.05 and $0.20 per mile over your limit. That can add up quickly - an extra 500 miles could cost you $100!
When you buy a car, you don't have to worry about mileage limits. However, as noted earlier, a vehicle's value generally degreases as mileage increases. It's difficult to calculate the exact value of said depreciation per mile, but generally speaking it's less than what you'd pay for going over a lease's mileage limit.
MAINTENANCE AND UPKEEP
The general absence of maintenance fees is often cited as one of the perks of leasing. Because your lease agreement covers the depreciation of the vehicle, any mechanical issues are often covered by the lessor's service center. This can be a boon, as general maintenance fees can add up quickly.
All that said damage or issues caused by the driver, such as interior damage and stains, can incur rather harsh fines or cleaning fees. If you have pets or small children, you may want to be wary of leasing as spills, accidents, and torn or chewed upholstery can end up costing a quite a bit at the end of your lease.
When you buy a car, on the other hand, it's entirely your responsibility to keep it running smoothly. The need for repairs and maintenance can come up unexpectedly and cost more than you might think. Keeping up with maintenance and repairs is a crucial step in ensuring you're able to get the most out of your car, both while you have it and should you choose to sell.
SHOULD I BUY OR LEASE: IN SUMMARY
Benefits of Buying a Car:
- You're the owner of the car - you're free to use it as you please and sell or trade it in at your leisure.
- With every loan payment, you're building equity in an asset you own.
- Over time, auto insurance is generally less expensive when you buy.
- There are no mileage restrictions or fees.
- There are no potential fees for extra wear and tear.
- It is often a better long-term investment, despite the higher up-front costs.
Benefits of Leasing a Car:
- Your monthly payments are generally lower. For those with lower credit scores, lease terms are often more appealing than high interest loans.
- Leasing is less of a commitment financially, and you can terminate a lease early if needed (with minimal penalties).
- There are often no down payments and no sales tax.
- Your standard repairs and maintenance are usually handled by the dealer.
- If you are self-employed, you may be able to write off your monthly payments as a business expense (check with your accountant).
- If you want to keep the vehicle at the end of your lease, you may have the option to buy it out.