Leasing vs. buying depends on your personal and financial situation. When leasing was first introduced, businesses were the primary markets. They leased fleets of vehicles, gave them as company perks, and then returned the vehicles at the end of the lease period.
Then, leasing was introduced to the consumer, which could allow you to drive a higher end car, with little money down, and pay a modest monthly payment. In some leases, most major maintenance was also covered under the lease. But which option best suits your situation? We have discussed the pros and cons of leasing vs. buying below.
buying
Pros: Buying your vehicle means that someday you may own it and no longer make monthly car payments. At anytime, you have the right to trade it in or sell it. Typically, insurance rates are lower and there are no mileage restrictions.
Cons: The downside of buying is the immediate depreciation realized once you drive it off the lot – all vehicles lose their value, particularly in the first couple of years (between 20% to 40%). Compounded with the down payment that is usually required at the time of purchase and a higher monthly payment means more out-of-pocket dollars.
You could find yourself in an “upside-down situation” which means you owe more on your car than its value. If you’re in an accident and your car is totaled, the insurance company will only pay the vehicle’s market value, which could be considerably less than what you actually owe on the loan. You could be in a situation where you have to pay on a car that you no longer own.
Leasing a vehicle
Pros: The upside is your out-of-pocket dollars are lower – both upfront and on a monthly basis. Under a lease, you’re only paying for use of the car for a certain period of time (generally 36-48 months) instead of paying for the cost of the vehicle; therefore, you will not find yourself in an upside-down situation as discussed above.
Leasing also allows you to drive a higher end vehicle that might not otherwise qualify for a loan. Most banks will not lend more than $30,000 on a car loan. If you’re looking at a vehicle above that amount, leasing may be your only option.
If you are a business owner, leasing may be a tax advantage if it is used for business purposes.
Cons: The downside is that generally, you will always have a monthly payment on a vehicle that you’ll never own. There are some lease options, however, that allows you to “buy-out” the vehicle at the end of the lease period.
Mileage restrictions can be a huge drawback, particularly if you drive a great deal during the year. Most leases have mileage restrictions between 12,000-15,000 miles/year. The penalty can be between 20-25 cents/mile over the restriction.
Insurance rates can also be higher on leased vehicles. Also, if you die before your lease ends, your estate could be responsible for the remainder of the lease.
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