Compare the pros and cons to help you decide
The soaring popularity of leasing in recent years may have you asking whether it is better to lease or buy your next car.
Once associated with luxury cars, leasing has become mainstream and reached an all-time high of 4.3 million vehicles in 2016. So, should you join these millions of drivers and enjoy a monthly car payment that’s typically lower than an auto loan payment?
An offshoot of the current leasing trend worth considering is the surge in off-lease vehicles entering the used-car market, which is lowering prices to the benefit of buyers. And buying a vehicle, like buying a house instead of renting, means you build up equity and have something to show for your payments when it’s time to sell and move on to something new.
These are just some of the things to think about when choosing whether to buy or lease. Read the pros and cons that follow to help you decide which option is right for your wants, needs and priorities.
Pros and cons of leasing
Lower payment – In effect, leasing means you’re just paying for the depreciation of the vehicle over the course of the lease term, plus finance charges, which makes the payment lower than that of an auto loan. The average lease payment was $120 less than a loan payment in 2016, according to Edmunds.
Late-model vehicles – You can enjoy that new-car feel and the latest technology and safety features.
A better-equipped car – Lower payments mean lessees may be able to drive a car they wouldn’t be able to afford to buy, such as a luxury model or one with higher specifications. Leasing is particularly popular among millennials, who lease proportionately more cars than other age groups, as “they can enjoy the benefits of owning a new vehicle at a low price point with the latest features they crave,” says Edmunds.
Reliability – You’ll be driving a new vehicle that’s less likely to suffer the reliability problems that can crop up over time in an older model. If issues do arise, they’re typically covered by the carmaker’s warranty.
Convenience – Just turn in the vehicle at the end of the lease without having to think about trade-in value or getting the best price from a private sale.
Costly in the long run – “In the end, leasing usually costs you more than an equivalent loan, if only because you are always driving a rapidly depreciating asset,” says Consumer Reports.
Mileage limits – The number of miles permitted on a lease term is normally 12,000 to 15,000 a year, and you’ll have to pay a fee for each mile over your allowance.
Maintenance responsibilities – Keeping the vehicle in good condition is part of the deal, and there are fees for excess wear and tear.
Early termination fees – Leases typically last 36 months and more fees and penalties may be imposed if you want an early exit.
Pros and cons of buying
Equity – With each payment you make you’re paying principal that builds equity in the vehicle until you own it outright.
Value – The longer you keep the vehicle after it’s paid off, the more value you get from it, says Consumer Reports.
A head start for your next car – With the vehicle paid for, you have an asset that can be traded in or sold. Cash from the sale can be used as you wish, whether as a down payment on you next car or for something else.
Family and pet-friendly – There are no wear-and-tear rules like those on a lease contract, so if you have messy children or pets that like to travel, there’s less need to worry.
No mileage restrictions – Feel free to take as many long-distance road trips as you like. However, together with the condition of your car, mileage is a factor that will affect resale value.
Higher payments – Loan payments are typically higher than those of leases because you’re paying for the whole vehicle, not just its use for a few years.
More interest with longer loans – Auto loan terms are increasing and reached an average of 69 months, almost six years, in 2017, according to Edmunds. A longer term may bring the monthly payment down but often increases total interest paid over the life of the loan.
Potential negative equity risks – A lengthy loan term increases the chance of being upside down, when you owe more than your car’s worth, if you want to change vehicles before the loan is fully paid.
Whether it is better to lease or buy a car is a compelling question for many people shopping for their first or next vehicle. Ultimately, it’s down to what’s right for your individual situation. Consider what’s most important to you now and in the future as you make your decision.