If it’s time to replace your car, you’ll need to decide whether to buy or lease your next vehicle. The best option depends on several factors—your budget, driving needs, lifestyle and credit history. Start by comparing the options and identify the best options prior to heading to the dealership.
Leasing
Today more than one out of four new vehicles are leased, according to IHS Automotive. This surge has been influenced by a shift in consumer culture where paying monthly for something is common and the need for the latest technology is high.
Some of the pros of leasing include:
- Monthly payments are lower with no or little down payment
- You have the car for the most trouble-free three years during the length of many new-car bumper-to-bumper warranties
- At lease end, you simply lease another one or walk away
- You can get a new car every 36 months with the latest safety and technologies and a new-car warranty
- Most states tax only on actual lease payments, not the entire vehicle price
- For businesses, you can claim it as a tax deduction
Here are some of the cons of leasing to consider:
- Once in the leasing cycle, you have endless payments
- The number of miles is usually limited to 12K to 15K miles a year. Driving more will mean an excess mileage penalty
- You must maintain the vehicle in good condition, or pay excess wear-and-tear charges
- To terminate a lease early, fees and penalties apply
- You aren’t allowed to permanently customize your vehicle
Buying
When buying, you pay for the entire vehicle value. Your payment depends on the value of the car, the length of the loan, and the interest rate, although dealers may offer incentives.
Some of the pros of buying include:
- You gain equity as you make payments, making it more cost effective in the long run. The longer you keep it after a loan is paid off, the more value you get out of it.
- Once the car is paid off, you own the car and have money for investing, saving for the future, and paying off other debts
- You are not locked into any type of fixed ownership period
- The insurance limits on your policy are typically lower than if you lease
- Buying a late model used car can result in lower payments
Some of the cons of buying include:
- Monthly payments are higher, and with down payments, the initial out-of-pocket cost is higher when buying a car
- A longer loan term can add up in interest, so you end up paying more for the car
- Payments reflect the whole cost of the car, amortized over a four- to six-year period. But depreciation can take a toll on the value of your car, especially in the first couple of years
- If the loan balance is higher than your resale value when you go to sell, you have negative equity. You roll the dice with its resale value
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