A lot of potential car owners find themselves asking whether they should buy or lease a vehicle. The answer will be highly dependent on how long you decide to keep the vehicle that you’ve chosen. It’s not a surprise to know that, in the recent years, cars depreciate very quickly – a new model is released mainly on an annual basis, meaning the new car you’ve chosen to purchase could be worth much less should you decide to sell it to buy a new one. This is where leasing a vehicle becomes a much better decision.
Firstly, let’s differentiate the two and make sure that we understand the benefits and drawbacks of each. This, in turn, will help you understand as the buyer which path to take.
Purchasing a Car
If you decide that you would like to keep a car as long as possible, buying a car is the best option for you. Also, if you find yourself having a significant commute from home to work (or if you live in a rural area), then buying a car is also an advantage. Once the car has been completely paid for, you won’t have to worry about any other payments other than the basics of owning a car such as gas or repairs.
Some people think that once they’ve processed the paperwork and made their down payment that they automatically hold ownership of the car – this is a common mistake. The car will not completely be yours until you have paid for it entirely. Before that happens, the lender will hold ownership of the vehicle. Speaking of lenders, another problem you may come across is the down payment. A lot of lenders require a sizeable percentage (up to 20%), and it can be difficult to come up with that kind of money, especially since you have to factor in possible costs of unexpected circumstances such as accidents.
Leasing a Car
If you’re the type of car owner that likes to have the latest and greatest car technology at your fingertips, then leasing is the way to go. Leasing is similar to financing or purchasing a vehicle, in that, there is often a down payment involved (albeit, much lower amount than when buying). When leasing there is always a residual value to factor in, which is the amount to which depreciation will amount to, while in the rental period.
Say, for example on a car that costs $20,000. The residual value may be at 50% or $10,000 – of course, this could be a bit less or, commonly, more. This means you’d only need to pay the $10,000 that you’d be using. Often, there is a lot more math involved in these scenarios, but hopefully, that gives you a clear picture as to why leasing is much more cost-effective than outright purchasing a car.
With the increasing cost of products and bills nowadays, having a predictable cost of car ownership will help you budget your expenses. Leases commonly include a bumper to bumper warranty during the entirety of lease term (which is usually 2 to 3 years).
A downside to leasing, which leads to a lot of questioning to potential owners, is the restriction to mileage. These restrictions can range anywhere from 9,000 to 15,000 miles. Typically, dealerships will allow you, as the potential owner, to the limit. They will then factor in any addition or subtraction to the leasing cost. Another drawback in leasing is if you decide to purchase the car at the end of the 24 or 36-month term, you will need to factor in a higher interest rate. This is because you will be financing a used car and that the leasing period doesn’t mean you will hold equity in the car.
The decision of whether to finance or lease a car falls upon the potential owner’s decision at the end of the day. Leasing is a good decision if you decide that after a certain amount of time; you’d like to have the latest car model of a specific brand. It is also a good way to manage expenses and at the same time save a considerable amount of money during the period that you’re deciding whether the vehicle that you’ve chosen will be replaced in the long run for something better.