Car buying vs. car leasing. That’s been an ongoing debate for a long time for those in the market to buy a car.
In 2017, about 30% of buyers chose to lease their car, according to Edmunds. That is expected to remain the same in 2018.
Even if you work from home, you still need to make a sound financial decision that you won’t regret later.
If you’re thinking about buying or leasing a car, keep reading to learn more about these options and determine which one is right for you.
Where You Really Get Hit in the Wallet
The first thing to understand the difference between buying or leasing a car is depreciation.
When you drive a new car off the lot after buying it, it loses 11% of its value. If you bought a $25,000 vehicle and drive around the block, that car is now worth $22,500.
Why does this matter?
Let’s say that you buy or lease a car and plan to buy a new car between five to seven years later.
According to J.D. Power, your car will still be underwater, meaning you’ll still owe money for the car. The average amount owed is $7,000 for a car that was purchased for $35,000.
This negative equity in the car can make your next car more expensive no matter if you lease or buy. The money owed can be rolled into your next vehicle, which drives up the cost of your next car.
You might want to consider buying a used car since the depreciation will slow down after the first 5 years. During the first five years, a car will lose about 60% of its value.
If you decided to buy a used car, then check out Car Corner to see what types of used cars are available.
Car Leasing vs. Car Buying
There are several notable differences between leasing a car and buying one. The main points are outlined below.
What Kind of Car Can You Afford?
You may be on a strict budget. With that in mind, your budget may limit you in terms of what you can buy outright.
With car leasing, you’re able to buy more car for less money. You can upgrade your car to a more expensive model or opt for a luxury vehicle you might not be able to purchase.
With a lease, you can trade in one luxury vehicle for another every couple of years. If you tend to get bored by cars often, this is a good way to combat that boredom.
Mileage
One thing to keep in mind with car leasing is that you have to stay under a certain number of miles when you turn your car in.
Most leases have a mileage allowance of 12,000 miles a year or 36,000 miles for a three-year lease.
If you turn your car in at the end of the lease and you’re over the mileage limit, you’ll have to pay an overage fee. This can be anywhere from 15 cents to 25 cents per mile. That will depend on the car manufacturer.
Now, 15 cents might not seem like a lot, but it adds up quickly. Let’s say you turn in your car with 37,500 miles on it. You’ll have to pay $225 when you turn in your lease.
This requirement will make you think twice about taking long road trips, which is half the fun of driving a car. If you do take several road trips during the term of your lease, you might have to consider driving less to make up for the mileage or paying the overage fees when you turn the lease in.
Down Payment
If you don’t have much money saved up for a down payment, consider car leasing. It’s pretty easy to find auto sales that don’t require a down payment at signing a lease.
When you’re buying the car and getting financing from a bank or credit union, you often need to have a down payment. That can be for 10%-20% of the purchase.
Monthly Payments
There may be a difference in monthly payments between a car lease and purchase. If you lease, your monthly payments will probably be lower than a purchase, unless you put a lot of money down up front.
Also, be aware that at the end of the lease you return the car and that’s it. You can opt to lease another one, but you have zero equity and trade-in value.
You could hope that the car retains its value over the lease period, and buy the car outright. If the car retains its value (and that’s a big if) beyond the buy -out price, you could sell the car for a small profit.
If the car doesn’t retain its value, it can become a very expensive monthly rental.
Wear & Tear Fees
Leases often have wear and tear fees when you return the car at the end of the lease period. You’ll have to be careful driving the car and in parking lots.
Those dings from shopping carts and other drivers could cost you, as you need to return the car in close to original condition.
You’ll also have to show that you’ve performed regular maintenance on the car.
Car Insurance Requirements
Car leasing usually requires that you purchase GAP insurance, which covers you in case the car is totalled or stolen.
GAP insurance will cover the difference between the value of the car and what you owe for the car if the car is damaged beyond repair.
Get the Best Financing for Your Next Car
The difference between buying or leasing a car can be tough to figure out. Both options have advantages and disadvantages.
You have to know what’s important for you when you decide whether to lease or purchase your car. Do you want more car for less money and have stable income? If so, then consider a lease. Leases are also better if you plan to hold on to the car for a short term.
If you want to own your car outright and drive it as much as you want, then consider purchasing the car. The payoff tends to be better when you’re buying the car for the long term.
Either way, the financial implications can be big. If you’re looking for more financial advice, check out our Money Blog to help you make sound financial decisions.