There are many reasons to keep a car in your driveway or parking lot. You might be moving to a city where the public transportation is less than reliable. Tomorrow might be the first day at your new job. You might have just found out that your family is about to expand again. The decision to bring home a new vehicle is usually a big one. Choosing the type that you wanted is usually the easiest part.
Figuring out a way to pay for the new vehicle is what becomes difficult. This expense is one of the most significant costs the average family faces, topped only by their housing costs.
If you don’t like the idea of saving up enough money to pay for a vehicle in cash, then there are two options available to you. You can either choose to lease the car that you need, or you can purchase the car through financing. Trying to secure a loan or financing plan can be a daunting task if your credit profile is average or worse. Leasing a vehicle is not always the best choice either.
If you are wondering what to do in this situation, then a review of the pros and cons regarding leasing vs. buying is in order.
List of the Pros of Leasing vs. Buying a Car
1. Leasing the vehicle will typically give you a lower monthly payment.
If your goal is to keep the monthly payment for your new vehicle as low as possible, then I’ll lease might be your best option. When your credit qualifies for a lease, then the cost to pay each month is up to 60% lower than what it would be if you were paying down a financing package through a traditional auto loan.
2. Leasing the vehicle removes your warranty concerns.
Nothing is more frustrating than to purchase a new vehicle only to have a breakdown within a few months of owning it. Unless you paid for a warranty as part of the purchasing price, you could be stuck with a massive repair bill. Getting one isn’t cheap either, what is the most long-term warranties priced around 10% of the MSRP for the vehicle.
When you choose to lease a vehicle instead of buying one, then you don’t have to worry about anything happening to it. No matter what, you are going to be covered, unless the contract you signed says otherwise. That’s why you must always read the fine print when bringing home a new vehicle.
3. Leasing the vehicle allows you to bring home something new every 36 months.
If you are a family that expects to maintain a car payment indefinitely, then a lease makes the most sense. You can eventually eliminate the payment when you take out a traditional auto loan, but that takes 5-6 years of on-time payments for that to happen. Assuming that you meet the stipulations of the leasing agreement, most drivers can bring home a new vehicle every 3 years or so while maintaining a similar payment each month. You’re never forced to try to repair the vehicle to keep it running should something happen to it because there is coverage provided in the agreement. When it is time to upgrade, then you don’t need to worry about trying to sell or trade in the previous model either. You just go to the local dealership, turn in the lease, and then start a new one.
4. Leasing the vehicle helps you to avoid the price negotiation process.
Haggling with a car salesperson is never a lot of fun. They are fighting for their income when you’re trying to lower the final cost of the vehicle you’re purchasing when you follow the route of the traditional auto loan. You can avoid this headache entirely when you choose to lease instead. You’ll get out of the dealership faster because you’re not securing a loan, there is less stress placed upon you to meet a specific price, and you still get to walk away with a great vehicle.
5. Leasing the vehicle helps you to avoid depreciation concerns.
New cars begin to lose their value immediately once you drive them off the dealer’s parking lot. Unless you are purchasing a classic car, a rare vehicle, or something antique, then depreciation is going to cost you immediately when you finalize a purchase. It can take years to make up this cost, assuming that the maintenance requires are minimal and there are no catastrophic repairs to make.
Carfax notes that the depreciation of a vehicle can be more than 20% after just the first twelve months of ownership. Over the next four years, you will then lose up to 10% of the value annually until its only value is to get you to your destination. A $45,000 vehicle could be worth $40,000 by the time you bring it home.
6. Leasing the vehicle can help you bring home a better make and model.
Because the monthly payments are usually lower when you decide to lease instead of buy, then you might be able to walk away from the dealership with a better-equipped make and model compared to what you could afford otherwise. When you add in the advantages of being able to ignore the trade-in value of the vehicle or trying to sell it when the time comes to move on, then it can become a tempting proposition. You’re always driving a late-model vehicle with this decision.
7. Leasing the vehicle could provide some tax advantages.
If you are a business owner, then the expense of leasing a vehicle can provide you with some tax advantages. Purchasing a vehicle offers some advantages as well, especially with the element of depreciation to consider. You will want to review both options to determine which one works with your finances the best before making a final decision. There can also be some lease rebates that are available to you that aren’t an option if you choose to purchase the vehicle through a loan instead.
8. Leasing the vehicle helps to prevent going upside down on the asset.
Longer traditional auto loans make it easy to be upside down (or underwater) with your purchase because the vehicle will be worth less than what you pay for it. This structure can make it stay that way for a long time. If your vehicle is stolen, destroyed, or you try to sell it with this issue, then you’ll still have a debt to owe. That isn’t the case if you opt to lease the vehicle you need instead.
List of the Cons of Leasing vs. Buying a Car
1. Leasing the vehicle requires you to have a stable, predictable income source.
Although this disadvantage applies to the traditional auto loan as well, your local dealership will not extend a lease offer to you if your income does not meet their expectations. There must be a stable paycheck coming in that will help you to meet this obligation. Being self-employed, losing a job recently, or dealing with medical collections are all ways that your finances can be upset enough to prevent approval of the agreement. You must have a backup plan in place if you are approved to ensure that you can meet the stipulations of the contract.
2. Leasing the vehicle almost always requires you to purchase gap insurance.
Gap insurance covers the amount of your vehicle based on what you paid for it compared to the amount an insurance company would offer if it was stolen or written off. Most polices remain in effect for about three years, which means you could receive up to 60% of the expense back in the later days of the vehicle. Leasing almost always requires this policy to be in place because of the structure of the agreement. You can often avoid it when purchasing a vehicle outright.
3. Leasing the vehicle restricts how you can use it.
Most leases will restrict the number of miles that you can drive each year while the car is in your possession. If you’re looking for the most affordable monthly payment, then your miles will be severely restricted. The typical contract will permit you to drive about 15,000 miles per year, although some manufacturers are bringing that figure down to 12,000. There are requirements that you keep the vehicle in a good condition as well. If you miss these marks, then there can be costly end-of-lease penalties that can set you back a few thousand dollars.
4. Leasing the vehicle requires you to make a substantial down payment.
If you walk into a dealership to sign a lease instead of purchasing a vehicle, then you’re still going to need a few thousand dollars ready to turn over right away. You will need to pay for the DMV fees in addition to an initial payment. Although the cost is usually lower than the 20% down payment recommended for purchase, you may find yourself paying $2,000 to $4,000 in costs at the beginning of the contract. Most leases will have a lower monthly payment when a direct comparison at 36 months occurs, but a 6-year traditional auto loan offers an alternative for buyers to think about.
When you consider a lease vs. a long-term traditional auto loan, the one primary advantage is that you’ll get to swap vehicles mid-way through the process. You’ll pay to start the second lease as well, which then negates the benefit of the lower down payment cost over the long-term.
5. Leasing the car can sometimes cost you more than purchasing from a value perspective.
When you start considering a six-year period of vehicle ownership, then leasing will typically cost you more than a loan of equivalent value because you’re always driving an asset which is rapidly depreciating. If you only plan to lease a vehicle over a three-year period once, and then move toward a different transportation option, then this is a decision that can make a lot of sense. Should you be looking for more of a permanent solution for your driveway, then buying is usually the safer choice.
6. Leasing the car does not give you credit for unused miles.
The lease you sign will specify the exact number of miles (or kilometers) you can put on the vehicle without experiencing an overage charge. If you go over the limit at the expiration of the limit, then you could pay anywhere between $0.10 to $0.50 for every extra mile that you put on above the agreed upon amount. Although that doesn’t seem like much, a 5,000-mile overage at $0.25 per mile would add an additional $1,250 to the cost of your vehicle. If the dealership deems that it was not kept in good condition, then you’ll have extra wear-and-tear charges to pay as well.
7. Leasing the car doesn’t give you options if you need to get out of the expense.
Most leases will force you to pay several thousand dollars in early termination fees. There may be penalties that you are asked to pay as well before your responsibilities to the contract are fulfilled. Those charges can often equal the amount of the entire lease if it were brought to term over the three-year agreement. If you decide to purchase the vehicle instead, then you can sell it to someone else, and then use the funds to pay off the traditional auto loan.
8. Leasing the car often prevents you from making modifications to it.
Most leases require you to provide the vehicle back to the dealership in what is called “showroom” condition. You’ll receive credit for the typical wear-and-tear that happens while driving. It must be configured like it was when you initially drove it off the lot when you first signed the agreement. Although there are some exceptions to this issue, such as professional tinting, you’re not permitted to make alterations that could make your new car feel more like your own.
9. Leasing the car means your payments will go on forever.
If you keep on leasing one car after another, then you will never see an end to your monthly payments. You can turn in the vehicle after the end of the contract to stop this expense, but then you will not have something to drive. If you purchase the vehicle, even though it takes longer to pay off the contract, you will eventually have something in your driveway that is 100% your own. It won’t cost you a monthly payment at all to sit in your driveway.
These pros and cons of leasing a vehicle vs buying one cover the crucial points of consideration to walk through as you look for the most affordable way to add a vehicle to your driveway. There is no easy answer to this solution. Leasing doesn’t allow you to have ownership of the vehicle, but the contract might include an offer to buy at the end of the lease if you want. You can avoid high initial costs, although what you pay will never go away. That’s why only you can answer the question as to which option is the best one to meet your needs.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.