The buy or lease decision when in the market for a new car can be made by answering the following questions: How long do you intend to keep the car? How much cash do you have and need? How much do you drive? Leasing a car is like a long-term rental. Most leases are closed-end, which means you have no obligation to buy the car at the end of the lease; you can "walk away". Buying the car works out to be cheaper if you intend to keep the car for a longer period, generally over 4-5 years.
|Buy a Car||Lease a Car|
|Ownership||You (the lessee) own the car||Lessor owns the car|
|Insurance||Lower cost||Higher cost|
When trying to choose between buying or leasing a car, all costs and fees must be considered to make an informed decision.
Downpayment for buying a new car can range from a few hundred to a few thousand dollars, depending upon the make and model of the car, your credit history, the time of the year and how well you negotiate. In general, downpayment is higher when buying than when leasing. Downpayments are usually negotiable when leasing a car and many dealers waive it entirely if you negotiate well.
In most states, there is an 8-10% sales tax on new car purchases. This could be a significant amount (a few thousand dollars) when you buy a car. The sales tax implications of leasing, however, are a little more varied. When leasing a car, you must pay sales tax on the down payment and on the monthly payments. Some states also tax signing fees. In some states, such as Illinois and Texas, you must pay all of the sales tax upfront.
Leasing is generally a little easier on the wallet but is not without its own set of costs. There is usually a leasing fee of around $1,000. You will also have to pay a security deposit.
Monthly payments are higher when buying a car because interest is calculated on the entire purchase price (minus the downpayment). The monthly payments for leased cars are lower in comparison. This is because when you lease a car, the leasing company expects you to pay not the full value of the car but only for the value that the car loses during the lease. For example, say you are leasing a new car worth $25,000 for 3 years. At the end of the lease, the expected value of the car is $16,000. So the leasing company would expect you to pay the difference i.e. $9,000 (plus some fees) over the 3 year term of the lease. This works out to a much lower monthly payment than financing a $25,000 new car.
There is, of course, a big caveat with leases: when the lease term ends, you don't get any money back. All your monthly payments are simply rent. With a car purchase, your monthly payments build up equity. If you own the car, you can sell it and recoup some of your monthly payments.
Insurance costs are higher with leased vehicles. What is more, if your leased car gets
You must also keep in mind depreciation, which is very high on a new car. It is said that a new car loses 10% of its value the moment you drive it out of the dealership. This is usually not a big deal if you are planning to own the car for 5-7 years. With a car lease, you pay only for the depreciation during the lease term so costs are lower.
The bottom line is that leasing has lower monthly costs so it frees up some cash for you to invest or use elsewhere every month. If you have other investment avenues such as stocks or bonds, you can invest this free cash to earn a return that offsets some of the leasing costs. But over the longer term, buying helps you build equity in the car that you can recoup when you sell. With leasing, all your payments are expenses never to be recouped. The longer the lease, the more unprofitable it is compared to buying.
Not all deals are equal. So it's not possible to make a generic assertion about whether cost-wise leasing is better than buying or vice versa. A lot depends upon the specific lease terms. This online calculator can help compare the lease vs. buy options available to you.
While cost is the primary consideration for most people, there are other factors that could influence your buy/lease decision.
If circumstances change (e.g. you have to move or you expand your family and need a bigger car) and you need to terminate the lease before it is scheduled to end, it can get pretty expensive. Buying the car offers greater flexibility in such scenarios.
With a lease there are limits to how much you are allowed to drive the car. Usually this is 12-15,000 miles per year. For most people this is sufficient but it depends upon your lifestyle. Depending upon your specific lease terms, there could be stiff penalties if you overshoot these mileage limits.
If you like having new cars every 2-3 years, leasing is a better option because there is time and effort involved in buying and selling cars. With leases, it is a relatively hassle-free process because you return the car when the lease is up. There is no negotiation involved for selling it.
Leased cars rarely get out of the warranty period so most repairs are covered. Some leases also offer maintenance contracts to cover all repairs and general maintenance in exchange for an additional fixed monthly fee.