How-to Buy a New Car, Part 2: Buy or Lease?
by Brian Wong (Aug 28, 2013)
Note: This is the second in a five-part series on How-to buy a new car. The other parts of the series can be found below:
Part 2: Buy or Lease?
One of the most fundamental new car buying questions is "should I buy, or should I lease?"
Speaking generally, there are two roads you can go down when buying a new car: taking out a loan to buy the car, or leasing. Unless you have the cash on hand to buy your new car outright, which is the best solution (it's the cheapest and easiest, and dealers love cash buyers as well), those are the two options for purchasing your next
vehicle.
We'll start by breaking down the advantages that each path has to offer, and feel free to pick the one that makes the most sense for you.
Leasing
It's easiest to think of a lease as a long-term rental; you pay a monthly fee to use the car, and at the end of the lease term the car is returned. There are a few caveats you should be aware of which we'll discuss when reviewing the advantages of a loan, so keep an eye out for those below. Leasing advantages include:
- Lower Monthly Payments/Down Payment
- Lease payments are not calculated on the price of the car, but rather by its "residual value" which is based on how much it will be worth at the end of the lease. As such, leases have lower monthly payments and smaller down payments than would be required if you were buying the car.
- Car remains on warranty for the duration of the lease
- Most lease terms are for 24-36 months, which is shorter than the warranty that comes with a new car. That means that for the time you lease the car, you won't be on the hook for major repairs.
- Always driving a new car
- There's something to be said for having a new set of wheels ever couple years. For some, driving the latest and greatest is a priority, and leasing allows you to jump from new car to new car on a semi-regular basis.
Buying
Buying is the more common route and it all comes down to one thing: equity and ownership. After you finish paying off the car loan, it's all yours — no having to return it to anyone, it belongs to you. The advantages to an auto loan/buying are:
- Equity
- Dollars that are put into the monthly and down payments lead toward ownership of your new car. When a lease ends, you have no car, but once a loan is paid, the car is yours no questions asked. Additionally, if something unforeseen happens, a car that you are buying can be sold in a pinch. Ending a lease early means paying a penalty and all the money that was spent on the lease goes poof.
- No worries about mileage caps, wear and tear penalties, and other leasing quirks
- Leases have their own unique set of terms including things like mileage penalties, which means if you drive over a certain number of miles per year, and they will charge you a per mile penalty at the end of the lease. There are also wear and tear penalties that can be incurred if the car is returned in less than perfect condition, as well as a penalty for breaking the lease early. Buying removes all these caveats from the process.
- Less credit is needed
- Leases require a better credit score and potentially a co-signatory if you don't qualify. A new car loan is easier to obtain and can actually help build credit, if paid off on time.
Generally speaking, we prefer buying to leasing in most circumstances, especially for commuters who rack up the miles or for anyone planning on keeping their car for more than 3-4 years. Although most leases do offer the option to purchase the car after the lease term ends, you'll be starting to buy the car at its residual value (and
probably with another loan) instead of having months of equity already bought into it.
There are a few cases where leases do make a lot of sense though — if you want the absolute rock bottom monthly payment, don't regularly drive a lot of miles, or plan on choosing a car that you won't want to drive for more than a couple years then a lease would be the smarter choice.
