If you're looking for a new car to start off the new year, take time to decide the best financial model for you. Explore the pros & cons of leasing vs buying a car.
If you're looking at a new ride this new year, choosing a financing model should be one of your first steps. Squaring away this important decision will help you shop with more confidence.
The main question you'll need to answer is whether it's better for you to lease a car or buy one. Both options have pros and cons, which you'll need to consider in the context of your situation.
When you lease a car, you're essentially entering into a long-term rental agreement with a fixed end date. Car leases usually last 24-48 months, though some dealers may offer shorter or longer terms.
In addition to the term length, your lease agreement will also specify:
Most leases also include what's known as a purchase option. A purchase option gives you the opportunity to buy the car at a predetermined price when your lease ends. When the lease expires, you can also choose to extend it or return the car to the dealer.
In comparing leasing vs. buying a car, you'll find buying is much simpler.
When you buy, you become the car's titled owner. You can pay cash for the car, or finance the purchase with a loan from a financial institution or car dealership.
Financing is very common, especially for new vehicles: Consumers finance new car purchases about 80% of the time. You'll make a down payment, usually in the range of 10-20% of the purchase price. You will then make fixed, scheduled payments until you pay off the car loan.
Leasing has serious appeal, which is why about one-quarter of new car buyers choose it. Key advantages include:
Leased vehicles are also usually under the manufacturer's new-car warranty. This protects you from most major repair costs and makes your driving budget far more predictable.
Car leases also come with several significant drawbacks:
From a purely financial standpoint, leasing usually carries higher overall costs than using a loan to buy the same vehicle. New cars sharply depreciate in value during their first few years of use—and that's exactly when you're making lease payments without getting any equity in exchange.
Lease agreements also include charges for "excess wear and tear." If you return the vehicle with dents, dings, stains, or other cosmetic or mechanical defects, you could find yourself responsible for hundreds of dollars or more in extra charges.
If your financial situation changes before your lease term is up and you can no longer afford your payments, you'll be stuck in a tricky situation. You'll either have to find someone to take over the lease or come up with the money to terminate the lease early.
On the plus side, you can get some tax benefits if you lease a vehicle for business use. This can generate savings that may make leasing a better fit.
Buying a car comes with many simple yet powerful advantages:
At the same time, buying and owning a car carries some drawbacks that don't apply to leases:
Most car loans are structured to cover the interest first, which means you don't pay down the principal (or build equity in the vehicle) until late in the loan term. This can lead to a situation known as "negative equity," where you owe your lender more money than the car is actually worth.
The longer your car loan's term, the greater your risk of ending up in negative equity territory. Longer-term car loans lead to lower payments, but you should balance that benefit against the potential risks.
Personal finance experts agree: Buying a car is usually better because you acquire a valuable asset for your money. When you lease, your payments don't build any equity in the vehicle.
That said, the controlled and predictable costs of leasing have serious appeal. Many drivers also like how leasing gets them into a nice new vehicle every couple of years.
Take your time as you consider leasing vs. buying a car. Crunch the numbers both ways, and consider how each option's pros and cons might affect your situation.
No matter whether you decide to lease or buy, keep your new ride running at peak performance with our acclaimed lineup of industry-leading products.