Buying a car is a major long-term decision and one that will probably affect your monthly finances for years to come. There are many things to think about, but one option that many people now consider is leasing a new vehicle instead of buying. So here we discuss leasing vs. buying a new car.
What is buying?
When you buy a car, you have two main options. You can either pay in full upfront – in which case the car is yours as soon as you hand over the cash – or you can use finance from a bank or credit union.
If you choose this option, you will have to pay a certain amount upfront and then will have to pay off the remainder of the loan plus the interest over a set period of time, usually several years.
What is leasing?
Leasing is when you pay to drive the car for a period of time, usually two or three years, after which you return it.
Leasing is slightly more complicated than buying a car with finance. In essence, you don’t pay for the value of the car; instead, you only pay for the depreciation in value during the time you use it – i.e. the amount of value the car loses during the lease.
The amount the vehicle is worth is known as the capitalized cost while the value of the car when the lease finishes is called the residual cost. The amount you pay is the difference between the two – plus the fees and interest. This is broken down into monthly payments for the duration of the lease.
Advantages and disadvantages to both options
There are advantages and disadvantages associated with both buying a car and leasing one. Let’s have a look at these in more detail now.
Pros of leasing car
- Cheaper monthly payments
One of the main advantages of leasing a car is that the monthly payments will be less than if you buy a car on finance. This shouldn’t be the only factor you take into consideration, but if you are looking to reduce your monthly expenses, this could be important.
- Smaller down payment – or none at all
When leasing a car, the initial upfront payment and other fees – sometimes known as the “drive away cost” – is less than when buying a car. Depending on the dealer and the agreement you reach, you might not even have a down payment to make at all.
- Often much cheaper sales tax
Although laws vary from state to state, often with a lease agreement, you only have to pay sales tax on the monthly payment rather than the value of the whole car. This can work out as a considerable saving.
- New car every few years
Another major advantage of leasing is that you will always be driving a new car. Leases are usually for two or three years, after which you can change. This also means the car you are driving will have all the latest tech. This is not something people who buy can enjoy so easily.
- Covered by warranty
Since when leasing, you will always be driving a new car that is covered by a warranty, you never have to worry about incurring extra costs for breakdown repairs etc. If the car has a problem, it will be repaired – and you won’t need to pay.
- Don’t need to worry about trading or selling at the end of the lease
When the time comes to return the car and take out a lease on a newer model, you won’t need to worry about selling or trading in your old vehicle. You simply return your car, choose a new one, sign the papers and drive off. (Well, it’s not quite this simple, but nearly!)
Cons of leasing car
- Need reliable income and good credit rating
If you are interested in leasing a car, you will need to have a stable income and a good credit rating. Most dealers are not interested in leasing to high-risk customers. If your income and credit rating are not sufficient, even if you find a dealer willing to lease, you are unlikely to get the best deals.
- Don’t own anything at the end
A major issue with leasing is that after three years of leasing a vehicle, when you return the car, you have absolutely nothing to show for it. With leasing, the money you spend is gone and you don’t own anything at the end.
- No cash for your next car
Related to the point above is the fact that when you return your leased vehicle, you have no money to use for your next one like you would if you had bought the car. This might be less of a problem if there is no upfront down payment, but if there is, you will need to find the money from somewhere.
- Costs more in the long run
Even though leasing might be cheaper month by month, if you lease car after car, trading in for the newest model after each lease ends, leasing will work out more expensive in the long run since you never stop paying.
- Need to apply for GAP insurance
When leasing, you will normally have to take out GAP insurance to cover yourself in case of an accident. Occasionally, this is included in the deal or can be negotiated – but insurance needs to be seen as another cost to take into account.
- Mileage limitation
With most lease deals, there will be a yearly mileage limit – which is totaled up at the end of the lease rather than year by year. If you go over the limit, the fee can be as much as 15-20 cents per mile. This may end up being a significant extra fee if you exceed the limit by a lot.
- Need to keep it in good condition
You need to take care of a leased car. While normal wear and tear is acceptable, if you return it with more than the expected amount of damage, including scrapes, dents and damage inside, you will have to pay. Often, what you pay can be down to the discretion of the dealer.
- Lease end surprises
When you return the car at the end of the deal, there may be some surprises awaiting you. For example, we’ve just mentioned mileage and wear and tear – the fact is, you never know just how much extra you are going to have to pay at the end of the lease. This can come as a nasty surprise.
- Lease agreements complicated to understand
Leasing is much more complicated than buying. Leasing has its own vocabulary, and the different fees and calculations can be difficult to understand. Sometimes, it’s best to bring in a professional to help you understand the terms of the contract and everything you will have to pay.
- Hard to get out of a lease agreement before the end
Once you have signed the lease, you’re pretty much stuck with it. While it is possible to get out of a lease before the end, you are likely to have to pay some pretty steep fees to cancel it – this is not a route you want to go down unless you absolutely have to.
Pros of Buying a new car
- Ownership of the vehicle
One of the most obvious advantages of buying a car is that you own the vehicle. Once the payments are completed, it’s yours – you have something tangible to show for all the money you’ve spent on it.
- No more payments when loan repaid
Related to this is the fact that once the final payment is made, it’s done and you don’t have to keep paying every month – unlike constantly leasing cars, where the monthly payments never end.
- Cheaper in the long run
Although buying a car is more expensive in the short term, it works out cheaper over the years. Again, once you’ve finished paying for it, you don’t have the monthly bill to pay, and you start saving money.
- Unlimited mileage
If you own the car, you can drive it as much or as little as you like. If you need to drive a lot, that’s fine. Similarly, if you don’t drive it, you’re not wasting miles you’ve already paid for in the lease agreement.
- Can customize
Since the car is yours, you can do what you like to it. If you want to add a flashy set of wheels, racing seats or anything else, it’s up to you. You might be able to do this with a leased car – but you would have to return it to its original state before you take it back when the lease is up.
- Can sell whenever you want
If you buy a car, you can sell it whenever you want. Even if you still have finance payments to make, this is much easier to take care of than trying to extricate yourself from a lease deal. This gives you more flexibility – especially if something unexpected happens.
- Easier to finance
It is much easier to arrange a finance deal for buying a car than it is to organize a lease. Even if your credit score is not perfect, you can still buy a car.
- Can refinance to save money
If the original finance deal you get doesn’t give you the best terms, you can always go back to the bank and renegotiate it later, particularly if your credit rating improves. By doing this, you can save yourself a lot of money – but this is impossible if you are leasing a vehicle.
Cons of buying a new car
- Higher monthly cost
The main constraint with buying a car is that the monthly costs will be higher. This might mean you need to look at cheaper vehicles than you would be able to afford when leasing.
- Post-warranty repair bills
If you own a car, once the warranty runs out, you’re the one who has to pick up the repair bills. You might be lucky and buy a car that doesn’t give you too much trouble – but you never know in advance. This can be mitigated slightly by choosing cars that are rated highly for reliability
- Need to trade or sell at the end
Once you decide it’s time for a new set of wheels, you have to go through the hassle and headache of selling or trading. This is part of life for any car owner, but that doesn’t make it fun.
- Pay interest on the entire loan
When taking out finance to pay for a car, you pay interest on its entire value. With a lease, you only pay interest on the difference between the price of the new vehicle (capitalized cost) and the value of the vehicle at the end of the lease (residual cost). This means you pay more when buying.
- You don’t know the value of the car later
When you buy a car, you expect to be able to sell it on later. However, sometimes it can be difficult to estimate a car’s value several years down the line, and you never know how much you will be able to recoup.
Tips and factors to take into account
1. Calculate your estimated mileage before considering a lease
Make sure you calculate the number of miles you expect to cover during the lease period as accurately as possible since if you go over the limit, you will end up paying a lot more.
Not using your mileage allowance is almost as bad as this means you are paying for miles you don’t use.
If you can’t work out your expected mileage, you probably shouldn’t consider leasing.
2. Short-term or long-term saving?
Leasing works out cheaper in the short term and allows you to drive a car that otherwise you might not be able to afford. However, buying offers you greater savings in the long run. When choosing between buying and leasing, you need to consider which you value more.
3. Calculate accurately
When working out which is best for you, do the sums properly – don’t just guess. Work out your monthly payments and work out how much you will be paying overall in each case. Having these numbers to hand will allow you to make an informed decision.
4. Have pre-approved finance before going to a dealership
If buying, arrange your finance before going to look at cars. If you have finance from the bank, the dealer may offer you an improved deal – but this is not possible if there is no deal to better.
5. Think about what you want to use the car for
Certain uses are prohibited with leased cars. For example, you may not be allowed to use it to drive for companies like Uber. Even if you are, the extra mileage and wear and tear this would entail would make leasing a car for this kind of activity a poor choice.
With all things being equal, we would tend to recommend buying a car over leasing every time. However, not everybody has the same situation, and with that in mind, once you take everything into consideration, you might find that leasing actually makes more sense for you.