Should you buy or lease a car?
Buying a new or used vehicle is a big financial decision. Even if you've managed to find the right car at the right price, you still need to figure out how you're going to pay for it. Typically, you have three choices: cash, finance, or lease.
Paying cash can be a great option if you have the available funds and your savings account can take the financial hit. It also means you immediately own the car and can do whatever you want with it. However, if you can't swing the cash, then your next option is to either finance or lease your new car.
If you're looking at financing a car, you're not alone. In fact, historically, most people go the finance route versus paying with cash, simply because it allows them to get the car they need by making monthly payments for a set number of months. And once you've made that final payment, the car is yours - title and all.
However, while most people opt to finance their car, many are also choosing to lease their vehicles. According to experian.com, 30% of new cars purchased in the U.S. during the first quarter of 2020 were leased.1
The concept of leasing is a lot like renting a house or apartment. Your monthly payments give you rights to drive the car, just as paying rent gives you a place to live. The caveat is that at the end of your lease, it goes back to the dealership. In other words, you never owned the car in the first place, but paid for the privilege of driving it.
Given these options, how do you know whether buying or leasing a car is the right choice for you? While there are no hard and fast rules when it comes to weighing the pros and cons of buying vs leasing a car, the following can help you make smarter car buying decisions by looking at your cash flow, individual lifestyle, and personal preferences.
Let's start with financing
The main benefit of financing is that you are using your lender's money for the privilege of driving your car off the lot. Yes, you'll have to pay interest on your auto loan, but you won't have to take a big chunk out of your savings account to get your car. And, as we pointed out earlier, once you've made all of the payments, you own the car.
However, some of the challenges that come along with financing are:
- The car isn't yours until you pay off your loan — If you think you may want to buy a new vehicle before the old one is paid off, your options are limited. You could very well run the risk of owing more than your car is worth at the time of your trade in.
- You have to qualify for a loan — Dealerships don't give loans to everyone who wants to buy a car. You'll need to apply for and then qualify for your auto loan before you can take the car home. If you have a low credit score, you may find it difficult to secure a loan.
- Your credit can affect the terms of your loan — There are a lot of great low interest financial offers out there to entice new car buyers. However, if you have credit challenges, you're more than likely being offered less desirable interest terms on your auto loan. That can mean paying a lot more than you expected in car payments each month.
- You'll need some cash to put down — Typically, most lenders will require some sort of cash down payment. If you don't have a trade-in vehicle, plan on bringing your checkbook to the dealership. Research by Edmunds.com of new and used car purchases, showed that the average car down payment in 2019 was about 12%.2
Now, let's move on to leasing
As with financing, one the benefits of leasing a car is that you can make monthly payments. However, leasing can be the better choice for people who tend to put a lot of miles on a car and buy a new car every few years. And, if you use your vehicle for business purposes (most people who do a lot of driving for business tend to lease), you may be able to deduct your lease payments from your taxes.
However, some of the challenges that come along with leasing are:
- You don't own the car — If you relish the thought of having a car that you own free and clear in the near future, then going the leasing route may not be for you. Often, leasing a car can feel like a never ending process with nothing to show after years of shelling out payments. Not owning your car also means you can't do any type of permanent customization.
- Leasing can cost you more in the long run — Leasing will typically cost you more than an equivalent loan, in part because of higher finance charges.
- You need to watch your mileage — When you lease a car, you have a limited number of miles that you are allowed to put on the car, as specified in your contract. If you drive more than that, you may have to pay an excess mileage penalty for every additional mile.
- Getting out of a lease early can cost you — If you need to get out of your lease before it expires, you could be stuck with some pretty steep early-termination fees and penalties. Be sure to check the terms of your contract before you sign.
As with any large purchase, it's always a good idea to weigh the pros and cons of buying or leasing a car before making a commitment. We hope this article helps you make the choice that's best for you the next time you go car shopping.
*The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation surrounding tax laws for leased auto deductions that used for business purposes.