To buy or to lease? That is the question. We may be paraphrasing Shakespear's words a little, but our question is also one that should not be taken lightly (and we're guessing Shakespear owned his horsedrawn wagon). The truth is, there isn’t one universal answer to whether you should buy or lease your next car. While leasing a vehicle is becoming more popular, it's not right for everyone. You need to understand the benefits and drawbacks of both leasing and buying to determine the right choice for your driving habits and financial situation. We take a look at the recent uptick in car leases, the pros and cons of leasing and buying, and who should buy vs. lease.
Leasing has become a more popular option in recent years. In the past, luxury cars comprised the bulk of all leased vehicles, but that is no longer the case. Today, people choose to lease all types of vehicles including small cars, mid-size sedans, SUVs, and trucks. According to ABC News, almost a third of all new vehicles sold in the U.S. are now leased. Part of the reason for this shift is the rising prices of new cars. Many people simply can't afford the high down payments and monthly fees.
Does the fact that leasing has gone mainstream mean it is the right decision for you? Not necessarily. Just think back to what our mothers always told us: "if everyone was jumping off the (insert tall structure) would you do it?"
Leasing vs. Buying
You'll find there are two kinds of car people in this world. Car person #1 needs the latest model every couple of years and wants to be one of the first to try out the latest and greatest new car tech. Then there's car person #2 who is the polar opposite. This person will drive the same vehicle for years and years and proudly show off their baby - a 1999 Chevy truck with 250,000 miles which "will last forever." You can probably guess #1 should lease, while #2 should buy, but there are other important factors to consider before jumping in.
Unlike when you buy a car, you will not be responsible for paying the full price of your leased car. When you lease (usually for 3 years) you will be responsible for the difference between the price you negotiate and the residual value at the end of the agreed-upon lease terms. There will be a fee similar to a down payment but smaller that will be expected when you sign your lease and the rest of the costs will be broken up into monthly payments plus the money factor or interest.
U.S. News & World Report provides an example to demonstrate the costs of leasing compared to buying a car. If you lease a 2018 Honda Accord at a price of $25,000, and the residual value at the end of the lease is 60% of the total, you'll only be responsible for paying 40% of the total, plus any interest and fees. 40% of $25,000 is $10,000 which is what will be split up into monthly payments after you subtract the money you put down. If you were to buy the same car, you will be responsible for financing the entire $25,000 and will be expected to have a down payment of 20%.
The benefits of leasing include lower monthly payments, a smaller initial down payment, no need to trade in your car when you're ready for a new one, and access to new cars and tech every few years.
There are some drawbacks to leasing that should be considered. When you lease a car, you'll be restricted by how many miles you can drive throughout the course of your lease. Most leases will offer between 9000-15,000 per year. If you drive a lot of miles, you'll likely have to pay overage fees which can add up quickly and negate any financial benefits to leasing.
Besides mileage restrictions, you'll likely find wear and tear fees and rideshare restrictions when you lease a car. While normal wear and tear isn't a big problem, you'll be expected to return the car in similar condition to when you first got it. You also need to consider the fact that you will not have any equity in the car once the lease is over.
When you buy a car and you pay off the loan, you own the car and will no longer have monthly payments to worry about. If you do continuous back to back leases, you'll never get rid of your monthly payment. When you buy, you'll also be building equity on the car as you're making payments on your loan. Unlike with leasing, there will not be any mileage restrictions or wear and tear considerations so you can use and abuse the car as you wish.
In terms of upfront and short-term costs, you'll be paying more to buy a car than to lease. You'll need to factor in the fact that interest will be higher because it is based on the full amount of the car. You can expect higher monthly payments unless you're able to come up with a large down payment at the time of purchase. In fact, a minimum down payment of 10-20% may be required which may be unreachable for some.
You may think buying is a better option because you'll be able to use the car as trade-in value in the future. Unfortunately, the unpredictable nature of car depreciation makes that amount uncertain. If you take out a loan, depreciation may also cause you to become upside down and owe more than the car is worth.
Who Should Lease?
Leasing is a good option if you're tight on cash and want to avoid a long-term auto loan which may put you at risk for being upside down on your loan. Leasing offers lower monthly payments and a lower interest rate which will benefit you in the short term. Plus, you won't have to worry about high depreciation rates and having to trade in your car when you're ready for a new one.
Another reason for choosing to lease has nothing to do with the financials (finally!). If you really enjoy trying out many different types of cars and getting the latest tech features every few years, leasing will be the best option for you.
Who Should Buy?
If you plan to put a lot of miles on your car for commuting to work, frequent weekend trips or cross-country trips, you will be better off buying a car and not worrying about going over the mileage limit. If you plan to drive more than 15,000 miles per year, leasing will not be the best option due to the mileage restrictions.
Even if you're not consistently putting a ton of miles on your car, you should also factor in how hard you drive it. How much wear and tear you put on your car will impact whether you should buy or lease. If you drive often, use your car for work or live in a busy city where your car is more prone to damage, buying a car will be your best bet.
If you want to get the most value out of your car by keeping it for a long time or if you enjoy modifying your car, buying a car will fit your needs better than leasing.