Once you've decided to get a new car, you have to make another decision. Should you lease it or buy it?
The answer depends on your situation. There are pros and cons for both leasing and buying. You need to determine which one works best for you.
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How Does Leasing Work?
Leasing means you are renting a car, and you agree to make monthly payments for a certain period of time, usually three years. At the end of your lease contract, you can either return the car to the lessor or purchase the vehicle for a preset price in your contract.
There are several factors that determine your lease payment. These include:
- the sale price, which you can typically negotiate with the dealer. However, at the moment, the microchip shortage has created a supply chain disruption and reduced the inventory and availability of new cars. As a result, dealers are reluctant to drop prices.
- the length of the lease contract, which is the number of months you agree to make payments.
- the expected mileage. The leasing company sets the maximum number of miles you're allowed to drive each year. Mileage allowances usually run from 10,000 to 15,000 miles per year.
- the residual value, which is the price you can pay for the car if you decide to purchase it at the end of the lease. It's not affected by current car prices.
- the lease rate, which is just another way of stating the interest rate charged on your lease.
- the taxes and fees. Sales tax and fees are added to the lease and included in your monthly payment.
Consider also: How to Lease a Car for a Teenager
Advantages of Leasing
Some benefits of leasing include:
- You're always driving a car with the latest technology and safety devices.
- The manufacturer's new-car warranty usually covers your car for the term of the lease.
- You can drive a higher-priced car than you could if you were buying and financing the same car.
- Lease payments are generally lower than loan payments for the same car.
- You don't have to haggle over the price when you turn in your car at the end of the lease.
Consider also: What Happens If You Do Not Turn a Car In At the End of a Lease?
Disadvantages of Leasing
Some disadvantages of leasing include:
- You're not building up any equity in your car with lease payments.
- In the final analysis, leasing costs more because you are paying for the car when its depreciation rate is the highest.
- If you exceed the mileage limit in your contract, you have to pay excess mileage penalties, which can range from 10 to 50 cents for each additional mile. On the other hand, you don't get credit for unused miles.
- You could face excess wear-and-tear charges if you don't keep the car in good condition.
- If you change cars in the middle of your lease, you could have to pay early termination fees and penalties. These figures could add up to the total amount of the lease payments.
- You still have to pay for expendable items such as tires.
- May need to include gap insurance in case your car is totaled in an accident.
- You'll need a good credit score to qualify for a lease.
Buying a Car
When you buy a car, you have to put money down and agree to make payments over several years. Lenders have more lenient credit standards for car loans.
Consider also: Can I Get a Car Loan After Buying a Home?
Advantages of Buying a Car
Some of the reasons for buying a car include:
- You build up equity in your car that you can use to buy another car.
- Qualifying for a car loan is easier than getting approved for a lease.
- You can drive as many miles as you want without worrying about being charged extra for it.
- You can customize your car to your taste.
Disadvantages of Buying a Car
A few of the downsides of buying a car include:
- A longer loan can make it easy to get upside down, meaning you can end up owing more than the car is worth.
- You have to pay for any major repairs not covered by the manufacturer's warranty.