Which Is Better For Saving: Leasing or Buying?
When looking for a new car, cost is always a consideration with all of the available options. If you are directly comparing leasing to buying to determine which is the smarter financial option, it is not strictly black and white. There are pros and cons associated with both options that need to be factored into the decision.
Pros of Leasing a Vehicle
The financial benefits of leasing a vehicle include:
- Cheaper monthly cost – your monthly payment does not cover the full value of the vehicle when you lease a car. You are only responsible for covering the depreciation in value for the term of the lease. Therefore, your monthly car payment can be significantly less than when you take out a loan to buy a car. The same car that costs $600 per month with a loan, may only cost $350 per month to lease.
- Option to switch cars at the end of the lease – leasing is a smarter choice financially if you like to trade in your vehicles every 2-3 years. With a car loan, you would lose money on the depreciation with a trade in if you only keep the car for a short period of time. With a lease, you lose nothing by starting a new lease with a new vehicle.
- A leased vehicle generally comes with a substantial warranty – a vehicle is covered by a comprehensive warranty in the first 2-3 years. Meaning, you shouldn’t incur any substantial repair costs while you are leasing a vehicle.
Cons of Leasing a Vehicle
The negative financial factors associated with leasing a vehicle include:
- Effectively, you are simply paying a rental cost – you can compare leasing and buying a vehicle to renting vs buying a house. Essentially, you are supporting someone else’s investment (in this case, the dealership’s, since they can sell the vehicle for profit later).
- You have to pay for “extras” – when you lease a vehicle, you have a limited amount of mileage that you can use during the term. If you exceed that amount, then you pay a surcharge when your lease is up. You may end up having to pay upwards of $1000 out of pocket. You may also be charged a fee if your car has more damage than what is deemed standard wear and tear. When leasing, remain aware of both of these factors and do what you can to reduce the likelihood you will be responsible for additional costs. Or, simply ensure that you have the funds available.
Pros of Buying a Vehicle
When choosing to buy a vehicle, there are the following benefits:
- A purchase is an investment – even if you purchase your vehicle with a loan, ultimately that supports your investment. Eventually, you will end up without a car payment, and you do have the option to sell the vehicle or trade it in.
- You can buy a used vehicle – when you lease a vehicle, you are limited to a brand new one and the higher costs associated with it. When purchasing you have the option of buying a used vehicle that is only a couple of years old for a substantially lower cost, finding reputable dealers like www.sportdursthyundai.com can be a great way to find low-risk used cars. If you find a vehicle with low mileage, it is like getting a brand new car, and there is a significant cost savings. According to Edmunds, after the first year, a vehicle is only worth about 81% of its (original) true market value. After two years, you would only pay about 69% of the true market value due to depreciation. Your monthly payment on a newer used car can be comparable to leasing the same vehicle brand new, but the benefit is that you will ultimately own it outright.
Cons of Buying a Vehicle
- Higher monthly payments if buying a new vehicle – if you purchase a brand new vehicle, the monthly payments can be high.
- Maintenance costs – although a new vehicle typically comes with a fairly comprehensive warranty that covers major maintenance in the first couple of years, eventually there will be costs. The older the vehicle is, the greater the likelihood becomes that you will incur substantial repair costs.
- Depreciation – while depreciation is beneficial when buying used, when you buy a new car, the rapid decline in value can be a major con. If you want to switch vehicles before you have paid off your loan, you may find the current value is less than what you still owe.
At the end of the day, whether buying or leasing a vehicle is the better financial option depends on what you’re looking for in a vehicle before you can make your decision and be happy with it.
Image courtesy of Edmunds.com