Car Lease Vs. Buy Options
Purchasing a new car is a major decision. That's why people often have difficulty deciding whether they should buy or lease.
When you purchase a car, you're buying the entire vehicle, from bumper to bumper and everything in between. When leasing, however, you're basically "renting" a new car from the leasing company. Generally speaking, if you want to build equity and plan on driving the car for a number of years, buying is a better option. On the other hand, if you prefer to drive a new car every few years, then a lease plan would be better.
For some people, the decision can come down to a simple cost comparison, which can be made by using the following calculator. Just enter your numbers into each field, then click the "Calculate" button. For more details on what to enter into each field, click on the words to the left of them (for example, click on the words "MSRP of Car ($)" to find out what you need to enter into that field).
Quite frankly, there are pros and cons to both buying and leasing a car, so let's look at them from two perspectives — finances and lifestyle:
Obviously, your finances determine how much you can pay for a car, both upfront (in a down payment) and in monthly payments. And regardless of whether you're leasing or buying, the bigger your down payment, the less you'll pay each month.
In general, monthly car-lease payments tend to be smaller than monthly car-purchase payments. A car's value goes down the second it's driven off the lot, and it continues to lower in value over time. On average, a car is assumed to depreciate by about 50% over its first three years, so the lease terms are designed to allow the leasing company to make back the lost value of the car by the end of the lease — plus interest.
Because monthly lease payments are geared toward half rather than all of a car's value, they're smaller than monthly purchase payments. The catch is, though, you'll have no car at the end of the lease, and therefore no equity. On the plus side, whatever money you've saved on your monthly payments can be spent — or invested — elsewhere.
When you finance a car purchase, you'll typically pay more each month, but once the loan is paid off, you'll still have the car, including whatever resale value it holds. You'll also avoid any lease-end charges, which can include wear-and-tear, excessive mileage and more.
Whether you're buying or leasing, you'll be paying interest charges, and the amount you pay, may be in part, determined by your credit score. So if you don't already have your credit score, take a moment now to find out what your credit score is.
Buying vs. leasing can also come down to a lifestyle decision. Because monthly car lease payments can be lower than purchase payments, you may be able to lease a higher-end vehicle than you can comfortably afford to buy. Leasing can also allow you to pick up a new car every few years rather than driving the same car for years on end.
The downside is that most leases come with yearly mileage limits. If you drive more than 10,000 to 12,000 miles a year, the excessive mileage penalties can cost you a significant amount of money when your lease is up. You'll also need to purchase car insurance, just as car buyers do, and some leasing companies require you to purchase at least $300,000 of insurance. The cost of the increased insurance premium can be more than other consumers who are buying cars are required to spend.
However, leased cars are covered by a warranty that can minimize the costs of major repairs and maintenance for the entire lease term. Car buyers, on the other hand, usually keep their cars past the warranty expiration date, increasing the long-term maintenance costs.
As you can see, even lifestyle choices come with a price tag, which is why you need to make an informed car buying vs. leasing decision.