Get your motor runnin’. Lookin’ for adventure. Have you been daydreaming about singing that song as you drive down the highway in your new ride? Then maybe it’s time for a new car. You know buying isn’t the only way to get your into that shiny new vehicle, leasing is another option that may be a better fit for you and your budget. Leasing may enable you to trade up to a new vehicle more often than an outright purchase. Best of all, the payments are traditionally much more affordable than buying.
When you buy a car, you own it and you’re responsible for the entire price. Your equity builds with each payment you make. You can trade your vehicle in at any time for a newer model or another vehicle. Unless the vehicle is completely paid off, you will need to either come up with cash or finance the remaining balance of the car. On the other hand, when you lease a vehicle, it’s similar to renting. You only need to pay the vehicle’s residual or expected value at the end of the lease. These payments are spread out over the term of the lease. Basically, you’re paying for the depreciation that occurs over the term of the lease. When the lease ends, you simply drop off the vehicle at the dealership and walk away. Let’s take a more extensive look at the pros and cons of buying vs. leasing.
The perks of leasing
Low upfront cost and lower monthly payments. Since you’re not actually paying the entire cost of the car, lease payments can be significantly less.
Ability to drive newer cars. Leasing enables you to get into a new vehicle every 3 years or so. If you like to be in the newest models with the latest technology, it’s a great option. You simply drop off your leased car at the end of the lease, test drive and select a new car and sign a new lease. Voilà, everything old is new again!
Lower down payment. This is a big perk if you don’t have much saved for a down payment and are in need of a new car.
You’ll pay less sales tax.
Many mechanical type repairs are typically covered by a warranty.
The drawbacks of leasing
The main drawback in our opinion is that you don’t actually own the vehicle. Because of the structure of a lease, you don’t really have any equity in the vehicle.
Mileage restrictions. This can be a real killer if you do a lot of driving. Vehicle leases have mileage limits built into the contract. If you’ve gone over these allotted miles over the life of the lease, you can get hit with a hefty excess mileage fee. The mileage amount is typically averaged over the lease term, so you may go over one year and under the next and still average out ok. If you know you will be driving a lot, a lease is probably not in your best interest.
Damage/excess wear fees. Dealers expect leased cars to be returned in excellent condition with no damage. You need to have the vehicle regularly serviced and be sure to keep everything in top working order. You don’t want to be hit with an unwelcome and expensive surprise at the end of the lease!
Insurance costs may be higher. Because the vehicle is not yours, you may be required to have more coverage than you’d like, such as GAP insurance in addition to your regular car insurance.
If you decide to end the lease early, you may face an early termination fee.
You need to have very good credit. Remember, the car isn’t really yours, so you can’t use it as collateral.
The benefits of purchasing a vehicle
No mileage limits! There are some great benefits to purchasing your vehicle. For one, unlike a lease, you have no mileage restrictions. You can drive as much as you want every day.
Once your vehicle is paid off, you won't have any monthly car payments. It’s great for those who want to take a break from monthly vehicle payments and put that money towards something else for a while.
You can customize your vehicle however you want and you don’t need to worry about damage or excessive wear fees.
Your vehicle is collateral for a loan, so your credit score doesn’t necessarily have to be excellent.
You can choose your level of insurance coverage unless a lender requires more.
You can sell your vehicle at any time and pay off any loan balance with proceeds from the sale. You can also trade it in for a newer vehicle at any time.
The cons of purchasing a vehicle
Cost is the biggest factor. Buying a car is definitely more expensive than leasing, at least for a while. Unlike a lease, you will need some type of down payment. And, unless you have a pretty big down payment, chances are a monthly lease payment would be much lower than a new car loan payment.
Depreciation. You never know what your vehicle will be worth when it comes time to trade it in or sell it. If something happens halfway through your loan term and you end up owing more than the vehicle is worth, you’re still responsible to pay off the loan. This is referred to as being “upside-down” on the loan.
A bit more about leasing – There are actually two types of leases
1. Closed-end lease – This is actually the most popular type of lease for a consumer. When the lease is finished, you return the car and can basically walk away from the vehicle. The only things you’d be responsible for are any excess mileage or damage. They’re sometimes even referred to as “walk-away” leases. They are perfect if you drive a predictable amount of miles each year and don’t drive in rough conditions. The leasing company estimates the vehicle’s end of lease residual value based on the miles allotted over the life of the lease. If the vehicle is actually worth less than the residual value when the lease is up, the leasing company takes the hit, not you! If the vehicle happens to be worth more than the residual value when the lease is up, and you have the option to buy it, you may want to do that, and either keep on driving it or sell it for a profit!
2. Open-end lease - This lease option is riskier. The lessee is responsible for paying any difference between the estimated lease value (the residual) and the actual market value at the end of the lease. This option is primarily used for commercial business leasing and really not suggested for an individual consumer.
So, should you buy or should you lease?
The choice is yours. If you’re in the market for a new vehicle you need to determine which option, buying vs. leasing, works best for you, your budget and your individual preferences. Weigh the pros and cons of each, which we’ve outlined above. Consider the monthly and overall costs and your end goals. This may include building equity or being in the latest and greatest ride every few years. When comparing buying vs. leasing a vehicle, be sure to figure in the cost of all financing and fees across the life of the auto loan or lease. And, don’t forget about mileage. That can be the determining factor for many of us. Be sure to do your homework, shop for great rates, search for a vehicle you really love and compare all the numbers.
A great source of information when your in the market for a new automobile is Spirit Financial Credit Union’s Car Shop 365 search tool. There’s no better place to start! Happy car hunting.