When is it better to lease vs. buy a car?
You’re done car research and you’re ready to buy a new ride. You’ve done your research and you know exactly what make and model you want. But when is it better to lease vs. buy a car?
How should you pay for it? It’s the eternal leasing vs. buying question, and it’s just as important as figuring out your car insurance coverage. Vehicle financing via a loan will cost more every month, but by the end of the term, you’ll own the car. Car leasing, on the other hand, has a significantly lower cost, but by the end of the agreement, you’re without a car again.
It’s a big question every driver has to ask. The big advantage of a lease is the increased cash flow, but the catch is if you’re always leasing then there’s always another monthly payment. Before you decide which choice is right for you, let’s take a closer look at the difference between leasing and buying a new car.
Back to basics: leasing vs. buying a car
If you want to buy but don’t have the funds to make an outright purchase, then you’ll need to take out a loan. Let’s assume, for the sake of simplicity, that the car you want costs $20,000 and you’re able to procure a loan with no down payment. You’re going to have to pay off that $20,000, plus interest, over the term of the loan.
It’s doable, but that’s a big financial commitment.
Let’s say you decide to lease as an alternative. Instead of borrowing the amount required for the purchase of the car, you’re only borrowing the amount the value of the car will depreciate over the term of the lease.
That’s the essence of leasing a car instead of buying one.
If the car’s value is expected to depreciate 50% over a three-year lease, you only need to finance $10,000 over the lifetime of the agreement. Even if the lease term is shorter than the loan term, financing $10,000 instead of $20,000 will result in much lower monthly payments.
It really helps with cash flow, and it could even bring some tax benefits if you’re self-employed. Once the lease is up, you have the opportunity to trade in your car for a newer model. Although maintaining this cycle means the payments never stop, you do get to enjoy the best years of a car’s life.
When is it better to lease vs. buy a car, otherwise?
If you choose to buy, however, the payments will end eventually. That makes car ownership more economical in the long term, provided that the vehicle is kept in good shape.
There is, of course more to leasing or buying a car than just monthly payments. Maintenance is another factor one must consider before deciding. Leased cars have an advantage here. Since lease terms are so short, cars are often fully covered by warranties for their duration.
If you buy a car, however, you’ll pay more for service over a long period of time. But if you’re a responsible driver and take good care of your vehicle, you should still come out on top in the long run. There’s also nothing stopping you from selling your car and putting that money toward a down payment on another automobile.
The verdict: when is it better to lease vs. buy a car?
Both leasing and buying have advantages and disadvantages. If you’re committed to leasing, you’re paying less every month for the rest of your life and you don’t have to worry much about maintenance. If you buy, you’re going to pay more in the short-term, but will eventually come out ahead if you take good care of your vehicle and resist the urge to upgrade.
When is it better to lease vs. buy a car a car, then? It will all depend on your immediate budget, cash flow, and the time you want to spend driving the vehicle.
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