Acquiring a new vehicle is one of the bigger purchases in life and the question of buy or lease can keep you up at night if you are not in the right mindset. In the buy verse lease decision there are many personal factors and expectations that must be considered.
There is not a clear cut answer to the buy or lease question, but what I can provide is specific benefits and drawbacks for both buying and leasing a vehicle. These insights will help you get into the right mindset to make your next right step in acquiring a new vehicle.
Is it Better to Buy or Lease a Car?
In the past the traditional thoughts when getting a new car was to either pay cash or buy and take out a car loan to finance. In recent studies on buying verse leasing, the leasing option, which was once reserved for corporate customers or high end luxury cars, has been gaining momentum in every segment of the car industry. Leasing has become more popular for a number of reasons including higher new car prices, lower monthly lease payments, and ability to drive more car then one could possibly afford.
Buying with an auto loan and leasing are very similar when we talk about financing a vehicle. When financing buying a car, the loan value is based on the total cost of the vehicle, minus trade-in value and the down payment. When leasing, the value you are financing is only the depreciation over the lease period (36-48 months) plus dealership fees. If you are not paying cash for the car, buying and leasing are two different ways to finance the new vehicle.
Benefits of Leasing:
- Typically lower monthly payments
- Most lease periods fall under manufacture warranty
- Allows you to get a brand new car every 3-4 years
- Do not have to worry about selling or trading in the vehicle
Drawbacks of Leasing:
- No ownership in the car, must return with zero equity at end of lease term
- Most leases limit mileage to 8,000-12,000 per year
- Must pay extra charges for exceeding “normal wear and tear”
- Must have very good credit to be able to lease
- Constricted by lease term – limited flexibility in case of relocation or sudden lose of income
Benefits of Buying:
- Option to keep the car for as long as you’d like – flexibility
- Build up equity in your car
- Drive as many miles as you’d like
- Allowed to modify the car (make sure you do not void warranty)
- If you get a minor dent, you can decide whether to repair or not
Drawbacks of Buying:
- Typically higher downpayment
- Typically higher monthly payments
- Must deal with trading in or selling vehicle
- Repair costs after warranty has expired
Given everyone’s situation and expectations vary there is not a standard formula when deciding between buying or leasing. We feel it best to have a Think Rich mindset and keep your car and transportation costs below 10% of your gross income less long term savings.