One of the most common questions people have when they are in the market for a new car is, “Should I buy or lease a car?”
To help you figure out your answer to this question, we’re diving deep into the world of car buying and leasing. Not only will we cover the main difference between the two, but we will also compare buying and leasing in four categories:
- The down payment
- Monthly payments
- Terms and conditions
- Mileage
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What is the primary difference between buying and leasing?
The main difference between buying and leasing a car comes down to one word: ownership. When you buy a car, you own it and can keep it as long as you choose. When you lease a car, you pay for the right to drive a car for a fixed period of time. Think of leasing as renting a car on a long-term basis from a dealership.
Lease terms usually last between 2 and 4 years. At the end of the term, you have the option to purchase the car at a predetermined amount (usually defined in the lease contract), or to return it. Leasing also comes with an extra set of terms and conditions that you need to abide by until the lease ends. These terms and conditions vary depending on the type of car you lease and the dealership you lease it from.
Now that we covered the main difference between buying and leasing a car, let’s take a closer look at each. You will find that buying or leasing a car comes down to your personal preferences, lifestyle, and budget. The following four categories were selected to help you figure out which option makes the most sense for you.
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Do you have money for a down payment?
- Buying: If you’re taking out an auto loan to purchase a car, keep in mind that you typically need to put down 10% of the price tag to get the best possible loan rates. The more money you put towards the down payment the less you’ll have to pay in interest, and you could potentially have lower monthly payments. Don’t have 10% of the car’s price tag to put down? You can consider:
- Buying a less expensive car
- Trading in your current car in exchange for credit toward the price of the car
- Saving until you have 10% of the car’s price tag
- Getting prequalified for an auto loan to ensure you will be able to make the minimum monthly payments
- Leasing: If you don’t have a down payment, leasing may be a better option for you. Depending on the dealership and type of car you’re leasing, you might not have to put any money down. You will have to pay a refundable deposit, taxes, and other fees to drive the car off of the lot, but the amount of money you pay upfront could be less than if you are buying a car.
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How are monthly payments different for buying or leasing?
There are two things to consider when thinking about the monthly payments you can afford: the length of time you will be making payments and how much each payment will be.
- Buying: If you take out an auto loan to purchase your car, you make monthly payments until the loan and loan interest is fully repaid. Meaning, after the loan is paid off you won’t have a monthly car payment. Your total monthly payment is impacted by several factors, including how big of a down payment you made, your credit score, and the loan’s interest rate.
- Leasing: Part of a lease agreement is that you make monthly payments until you return the car. There isn’t a “pay off” date. The monthly payments for leasing a car depend on several factors, including:
- Car sale price
- Length of the lease
- Expected mileage
- Residual value (the value of the vehicle at the end of the lease)
- Rent charge
- Taxes and fees
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What are the terms and conditions?
- Buying: When you buy a car, you have the flexibility to trade it in, sell it, or use it until the wheels fall off. You can also modify your car, drive it as much as you’d like, and you don’t have to sweat it when your car gets a dent, ding, or scratch. If you have an auto loan, all you need to do is make on-time and consistent minimum monthly payments to be on great terms with the bank.
- Leasing: Leasing a car comes with a set of rules to abide by. These rules vary depending on the dealership you are leasing from, as well as the type of car you are leasing. For example:
- If you return the car early, there are often early termination penalties
- If you want to make any modifications to the car, you need to ensure that the modifications would not break the contract
- The car needs to be returned in great condition, or you will end up having to pay for repairs
- There is a predetermined limit to the number of miles you can put on a vehicle during the lease term (more on this below)
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What mileage do you expect to put on your car?
- Buying: Do you drive a lot for work? Do you love taking road trips? If you answered yes to either of those questions, buying a car may be the best choice for you. When you buy your car, you can put as many miles as you’d like to on it.
- Leasing: The typical mileage limit for leases is between 10,000 to 15,000 miles per year. When the lease ends, the car’s mileage needs to be at or below the previously agreed upon limit or you’ll be charged an overage fee for every mile over the limit.
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Conclusion
Ultimately the choice between buying and leasing a car depends on your preferences, your lifestyle, and your budget. As with any major financial decision, it’s best to do your homework to figure out what makes the most sense for you. Take your time in making the decision, and shop around. Prices, whether you are buying or leasing a car, will vary from dealership to dealership. Dealerships will also run the numbers for you, making it easy to see the differences between buying and leasing a specific car.
This blog is not intended to provide any tax, legal, financial planning, insurance, accounting, investment, or any other kind of professional advice or services. To make sure that any information or suggestions in this blog fit your particular circumstances, you should consult with an appropriate tax or legal professional before taking action based on any suggestions or information that we provide.