So you’re considering getting a new car but you’re not sure whether you should buy or lease? The answer depends on a number of factors including your budget, your automotive needs, and the scope of your expected usage. For many, the decision to buy or lease will depend on a combination of factors, particularly what you can afford and what you plan to do with your new car.
Affordability is especially relevant for car buyers. During a period of persistent inflation, the skyrocketing cost of cars is a clear bellwether of our current economic situation. As the Consumer Price Index (CPI) has risen, the price of new and used vehicles has become a regular and painful reminder of the escalating cost of life in America. In February 2022, Kelly Blue Book placed the average final sale price of a new car at $46,085. While this is slightly down from an all-time high in December, this figure also marks a $5,000 increase over just the prior year.
Cars have gotten incredibly expensive. A series of cascading factors from a global shortage of microchips to Russia’s invasion of Ukraine to a general array of overlapping supply chain failures has ratcheted the cost of cars to previously unseen heights. So when you are presented with a choice between buying and leasing, you do have a lot to consider.
Whichever way you go, you also have to consider the ideal car insurance coverage for your needs. As long as you’re on the hunt for a new car, you should also check out our 5 Key Tips For Buying Car Insurance.
If you’re still trying to decide on the best way to pay for your new car, read on…
What’s the difference between buying a car and leasing a car?
In the simplest terms, when you buy a new car, you are paying to own the vehicle whereas when you lease a vehicle, you are paying to borrow the vehicle from a financial institution for a designated period of time.
When you buy a car, you have the option of paying for it in cash or financing ownership through a traditional auto loan. Obviously, when you buy a car with upfront cash, it belongs entirely to you the minute you drive it off the lot. When you finance a vehicle, you will make monthly payments both on the principal loan amount and on interest over a designated length of time, which may vary from anywhere between 48 and 84 months. Once you’ve completed your financing obligations and interest payments, the vehicle belongs to you.
With a lease, you will make monthly payments plus interest to your lender in order to use the vehicle for a designated length of time, usually between 36 and 48 months. According to Consumer Reports, “With a lease, buyers make a monthly payment to drive a new car for a set term. That payment is often less than the monthly cost of financing a new vehicle, but buyers must return the car at the end of the lease term.”
Indeed, because you are not the owner of the vehicle, a lease will typically come with an array of maintenance obligations and usage limitations, particularly on the amount of driving mileage covered by your lease agreement.
The Pros of Leasing a Car vs. Buying
In the face of rising new car prices, leasing has become a more popular option than ever before. Technically, says Consumer Reports, the way leasing works is that, while “you have possession of the car during a lease, it actually belongs to a financial institution, which might be a bank, an automaker’s finance arm, or another type of finance company. Once you negotiate a price with the car dealer, the leasing company then buys it from the dealer for that agreed-upon price and leases it to you.” This arrangement carries certain benefits:
- The overall monthly cost of a lease is typically lower than the cost of financing a new car. This means that leasing gives you access to a better car than you might be able to afford through financing. Not only that, but you actually get the car for the best years of its life. With most leases, you’ll be paying to assume temporary ownership of a model that is either recent or brand new, but at a reduced cost relative to the price of the very same car through a financing arrangement.
- You typically enjoy extensive warranty coverage. Whereas a warranty for your newly purchased vehicle may be riddled with fine print and restrictions, the financial institution that owns your leased vehicle actually has a vested interest in preserving this asset. This means that your lease will usually come with more comprehensive warranty coverage and fewer bureaucratic hassles when it comes to redeeming service under this coverage.
- Some leases come with perks like free scratch and dent repair, regular maintenance check-ins, and free oil changes or tire rotations. In most cases, these are perks that you’ll disclose when signing the papers for your lease. As always, be prepared for the up-sell on additional coverage options. While some leases may include a number of the perks outlined above for free, many others will be optional add ons.
- Leases come with zero-hassle trade-in, as long as you meet your payment, maintenance and mileage terms. If the vehicle is in good shape and you’ve stayed within the allotted miles, returning your vehicle at the end of a lease should take very little effort. You have no obligation to sell or trade the vehicle, though many drivers will choose to enter into a subsequent leasing arrangement for a newer car once the previous lease period is over. This, of course, speaks to another major benefit of leasing, which is the promise of getting a brand new car every three to four years!
The Cons of Leasing a Car vs. Buying
While leasing is a desirable alternative to buying for many drivers, there are conditions specific to leasing that you need to consider first:
- You’ll never actually pay off your leasing commitment. This is one of the main drawbacks of leasing. When you finance a vehicle, there is a payment end date. Once you’ve met your payment obligations, your household budget will be relieved of a hefty monthly payment. With a lease, there is no payment end date. Consumer Reports points out that “If you lease one car after another, monthly payments go on forever.” This also underscores the fact that you don’t build equity by making monthly payments for the right to drive the car. As a lessee, you gain zero ownership for your monthly expenses. “By contrast,” says Consumer Reports, “the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.”
- Your lease may come with mileage limitations and penalty charges for exceeding these limitations. This is a major drawback to leasing for those who intend to use their cars for commuting, business driving, or travel. Try to match your prospective lease with your actual likelihood of usage, factoring in work and vacations. If you anticipate a particularly high level of usage, a lease simply may not be right for you.
- You may be responsible for damage to the vehicle that goes beyond wear and tear. This is something that you’ll want to consider as you negotiate the initial terms of your lease. You will be offered some free coverage options under a warranty, but your agreement will also indicate the type of damage that isn’t covered by a base agreement. You may have an opportunity to pay more for additional coverage. It’s up to you to decide what kind of coverage is worth it for you. For instance, if you regularly parallel park your car in a bustling city, you may want to pay extra for scratch and dent coverage. If you don’t carry this coverage, there’s a chance that even minor dings could cost you a lot more when you turn in the vehicle.
The Pros of Buying a Car vs. Leasing
Cars have gotten expensive, but a good, reliable vehicle with the promise of longevity is a valuable asset. So what are the advantages of buying a car rather than leasing?
- Every payment you make advances your ownership of an asset. Obviously, if you pay for the whole thing upfront, you will own this asset outright. When you finance, as long as you meet your payment obligations, you will take another step toward total ownership of this asset every time you pay your monthly installment.
- There are no restrictions on how many miles you can drive. Whether you buy your vehicle outright or finance it, it’s yours to drive as far as you see fit. If you drive a long commute, spend significant time on the road for work, or intend to use your vehicle regularly for traveling, this particular benefit of buying may be a determining factor.
- You won’t be financially liable for wear and tear charges. Obviously, it’s a good idea to take care of your car, especially if you want to retain the value of this asset. But when you lease a car, you may be on the hook for a wide variety of penalties for returning the car with minor scratches, a cracked glove compartment latch, or that impressionistic work of art that your 5-year-old created with an indelible marker on the back of your headrest. If you own the car, you can choose to fix it or, in the case of your kid’s artwork, frame it. If you lease it, you don’t have that freedom, and it may cost you.
- You have the right to trade or sell the car at your discretion. As an owner, you are in a position to gain some return on your investment whenever you see fit.
The Cons of Buying a Car vs. Leasing
While buying a car may put you in control of a valuable asset, there are a few arguments against taking on this obligation:
- New cars cost an absolute fortune today. The top drawback to buying a car today is that car prices have reached historic highs. Prices on both the used and new vehicle market have risen to new highs in the face of inflationary trends, high oil prices, global supply chain issues, and geopolitical upheaval. How do all of these very complicated matters impact you? For one thing, you’ll be paying a lot more to own a car than you might have just a year ago. And according to Forbes, “as the average cost of new vehicles increases, buyers are turning to longer-term loans to lower the monthly payment, with 72- and 84-month terms becoming more common. Those long auto loans mean you’ll pay much more interest over time compared to 48- or 60-month terms. This puts buyers at risk of ‘being underwater,’ which means their still-not-paid-off vehicle is worth less than they owe.”
- New cars tend to rapidly depreciate in value. Your car is worth less “the second you drive it off the lot,” says the old cliche. This may be a bit of an exaggeration considering the steep demand even for gently used cars today. But it’s true that, as assets go, buying a car might be deemed a “bad investment.” Investopedia points out that “When you buy a car you either pay cash or get a car loan and take title to the vehicle. If you finance the car you build equity in the car over time. Automobiles are depreciating assets, however, and can sometimes depreciate faster than a person builds equity through payments.” While your home, retirement fund, and sports collectibles are all going up in value, your car is slowly losing value just sitting in your driveway.
- Repairs and maintenance are all on you, especially after your initial warranty expires. Most new cars come with a basic warranty. If you are purchasing this car, make sure you understand exactly how long this warranty lasts and what it covers. Anything not covered by this warranty will be your personal expense. And once this warranty expires, you will be financially responsible for anything that your vehicle requires—and anything that happens to your vehicle. Kiplinger also warns that some warranties are better than others. Make sure you know exactly what you’re getting with this warranty. Kiplinger notes that “Some warranties on new cars are not worth the paper they are printed on (expensive mechanical systems that tend to give trouble are sometimes not covered) and often the dealer will try and talk you into purchasing an extended warranty.” (Consumer Reports also advises buyers to be wary of the fine print in extended warranty agreements).
If you’ve decided to buy your car, congratulations on making an exciting new purchase! Given the climate of the auto market, we’re guessing it wasn’t cheap. So to help offset this expense, we offer 5 Tricks for Getting Cheaper Car Insurance.