Should You Buy or Lease Your Next Car?

Buying a car is a big decision for most people.  They will use their new vehicle to transport them and their loved ones to work, school, and play over the next few years, safely and hopefully, economically.

You can choose to buy a car or lease it. If you buy your car, you have the option of a new or a used car. Buying is almost always better than leasing.

The New vs. Used Argument

Let’s take a look at buying to start with.  Economically, it makes more sense to buy a used car than a new one.  If ‘new’ appeals to you, a slightly used and/or certified car will foot the bill.

Why used?  Well, the reason is that when you drive a car off the lot, you immediately lose a chunk of its value.  In some cases, this reaches 25% of the original price.  Many therefore refuse to pay the premium for new cars and instead purchase only used ones.

I know of extremely wealthy individuals who only buy used cars, so maybe they’re trying to tell us something about how they got wealthy.

For those who must have the “new car smell” (which actually consists of dangerous toxins), just seek out the best deals possible, which we’ll deal with in a future article.

Differences Between Leasing and Buying

When you buy a car, you purchase the car in its entirety through a series of fixed payments.  The bank or dealer may offer you a loan at a specific interest rate.  After the payments are over, you own the car.

A lease is completely different.  You make a series of payments to compensate for the lost value of the car during your lease term.  At the end of the lease, you do not own the car.

You have two options at this point – give the car back, or purchase the car by paying for the depreciated car at its used car rate.  This always costs more than if you had simply bought it in the first place.

So, as you see, buying is pretty straightforward.  Leasing is a bit more complicated.  There are multiple fees that you pay prior to leasing e.g., up-front sales tax, and you don’t own the car at the end of the lease.

However, the cost of leasing a car is usually 30-60% lower than the payments for that same car as you are only paying for the difference between the car (depreciation) from the start to the end of the lease.

The argument can be made that the difference can be invested, making a stronger argument for leasing.

However, if the car owner holds on to their car for say, 10 years, these savings evaporate as the car owner ceases making car payments.

When Should I Lease, Then?

If there is no residual ownership and there can be multiple, complex fees, does it ever make sense to lease? In some cases, yes.

If you always want to drive a new car (and can afford it, hopefully), then leasing may be for you.  It will certainly be cheaper than buying and selling a car every couple of years.

In addition, if you are able to take over a lease from an existing owner of a lease, you avoid many of the current front-end fees for leases and this could make it more financially attractive.  Sites like swapalease.com help to match lease owners with buyers.

If none of these conditions exist, you are best served by buying, rather than leasing.

One additional note is that some leasing vendors now advertise the “lease-to-buy” option, where you purchase the car after the lease period.  This is always a bad idea – you will pay more than if you had simply bought the car in the first place.

If you are being sucked in by the lease-to-buy argument, forget it.  Simply buy the car.

Benefits of Buying a Car

If you keep a car for the long-term, it is always cheaper than leasing.  In most cases, a lot cheaper.  Basically, after a 3 or 5-year payment plan, you have no more payments on the car until you sell it.

If you end up keeping the car for 10 years and paid for it over 3 years, that is 7 years without a car note.  In addition, you will still be able to sell the car or trade it in for its residual value.

Today especially, cars are so much better quality-wise, with some having 10-year warranties, that a maintained car can be driven for 10 years or more. This makes the argument for leasing even weaker and for buying much stronger.

Summary

If you are considering a buy vs. lease decision today, there is a much more compelling case to buy your car instead of leasing.

Personally, I would lease only if the lease was being paid for by my employer.  Otherwise, a slightly used car would be the best option for people.

If you must lease, try to take over a lease from an existing lessee and avoid front-end fees.

Tags: auto, auto lease, bank, buying a car, car, car lease, comparison, cost, cost comparison, depreciation, featured, loan, new car, rate, sales tax, used car

Category: Loans, Personal Finance