Buying Vs. Leasing a Car: What’s the Smarter Choice?

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Just by reading the title of this article you might think you already have an opinion of which choice is the best. But do you know all the facts? Is it smarter to lease a car or purchase one?

What’s a smart choice for you now may not be the best one down the road, as your life and money situation changes. We dive into the pros and cons of buying versus leasing a car, so you can make the most informed decision possible.

What You Need to Know About Buying a Car: The Pros and Cons

If you can pay cash for a car then you’ll own an asset (albeit a depreciating one), and if you finance, you will eventually own it. This means you can sell the car whenever you want to, based on your family’s needs. You can also customize it to your liking by painting it, or making other material changes to its appearance. It’s yours to do with as you want.

Another upside to owning a car is that the auto insurance is cheaper versus leasing a car, since you won’t be charged fees for going over on mileage or damaging the vehicle. In the long-term, it ends up being cheaper to own a vehicle outright, instead of leasing one.

Like with any list of pros there are going to be a few cons. If you finance a new car, you will likely have to put down a down payment AND make higher monthly payments than you would if you leased. For those who already have a car loan, use ReadyForZero to track your debt paydown.

The longer you own a car the more repair costs you’ll incur, meaning the car could be in the shop for days at a time more than once, or it might break down at an inopportune time. Additionally, once the warranty is expired, you will be responsible for paying the full cost of maintenance and repairs.

A vehicle is a depreciating asset, so it is less valuable to own than appreciating assets like real estate and stocks. This isn’t to say that buying a car isn’t a smart move, you just need to be aware that after a number of years it will likely have little to no resale value.

You’ll also have to deal with selling or trading the moving when you’re ready to upgrade or buy a different vehicle. If you leased a car you won’t have to worry about this, since you can just turn it in.

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What You Need to Know About Leasing a Car: The Pros and Cons

If you don’t have a lot of cash flow, leasing a car can be a good move until you’re able to increase your income. Leasing a car typically means lower monthly payments than financing a car, so it’s a slightly more affordable option upfront.

The down payments are smaller compared to purchasing a vehicle or not required at all. And because of this you can drive a nicer car than you would generally be able to afford if you decided to purchase one.

Unlike when you drive a new car off the lot, leasing a vehicle means you don’t have worry about depreciation. You can also drive a newer car that likely won’t have maintenance issues, since the car will almost always be covered under the manufacturer’s warranty.

It is generally easier to qualify for a lease without having a long credit history. Leasing a car can be a more worry-free option, that’s a bit more friendly on your budget.

Again, the pros can make it seem too good to be true, so let’s cover the drawbacks to leasing a car. For one, insurance costs are a lot higher since the premiums often include gap insurance, and the car payments won’t end as long as you lease the vehicle. You’ll incur penalties for wear and tear, as well as going over the allotted number of miles.

Since you don’t own the car, you won’t be able to do any customizations to it, so it will never truly feel like your personal property. In the long-term, leasing costs more than buying and is not a good solution if you want to achieve financial freedom.

If in the event you need to break the lease, it can cost a lot of extra fees and penalties, which doesn’t leave much room for lifestyle changes or flexibility like owning a car can provide.

Should You Buy or Lease a Vehicle?

In a study by Edmunds, they calculated the costs of owning a car versus leasing, based on a new $20,000 car financed over a three-year period at 6%. They found that after five years, the real cost of owning a car was slightly higher than leasing, when all the costs were combined (monthly payments, insurance, taxes, maintenance, etc). The total cost of ownership of this car for five years was $32,388. Under the same circumstances, the cost for leasing this vehicle during the same five-year period, was about $250 less, or $32,140.

So if you were to look at the costs side by side, it might sound better to lease a new car instead of buying one. But you have to take into consideration that you don’t own the car, so you can’t customize it or include it as an asset.

In order to fully understand the true costs of buying versus leasing a car, you have to take into account all of these aspects, and how they will affect your financial future.

Image Credit: Mickas

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  • Joe Brock

    You missed one important variable. The opportunity cost. If you’re disciplined enough to take the cash saved by leasing, that is, the down payment and increased monthly costs, and invest it into something that will (hopefully) appreciate in value, stocks, bonds, savings, etc, after three years you also have an asset. Is the money better invested in a car that depreciates, or in your bank account or investment?

  • Allen C

    Even after 5 years, the owned car would (should) have more value than $250. Plus, if you drive it for another 5 years, there’s no out of pocket financing or lease costs. Some cars have a reputation for longevity not flash. Skip the flash (same advice for marriage).

  • David Johnson

    I really think it’s not so simple. Cars cost a lot more to own than people often realize. At the end of the lease you often have the option to buy as well, so it’s not really true that you don’t own the car because essentially you are allowed to buy it at the end. In general I would say, having owned 23 cars, to either lease new, or buy used but in any case under a warranty.

    The manufacturer knows way more than you do about the real value, and have professional actuaries and other experts very carefully calculating costs and expenses.

    If it’s not under warranty the manufacturer is basically saying it’s a bad deal. It’s in their advantage to make the warranty as long as possible as it helps them sell more cars and also because they make the car they can fix much cheaper than you.

    Plus when you sell a car you own, you have to negotiate on the price. You can easily lose the savings here when you sell it.

    I think you have to look at your total monthly payments. Gas+financing+insurance. Often getting a new car is worth the lease alone because in general fuel economy goes up about 20% every 3-5 years, meaning that many people would save $50-200 on gas alone.

    I see too many people who have unreliable cars and pay in career and relationships as well as maintenance: alternators, brakes, batteries, belts, service, tires, etc.. The thought is always: just this one expense and then it will be fine, yet it only gets worse.

    If your concerned about money, lease the car, and go spend your time trying to make money instead. Invest in education or other things that will have real noticeable impacts on your income.

    • ddm1959

      I’ve owned my two cars for years and have not incurred excessive cost , just regular maintenance such as oil changes and filter, brakes every no and then.

  • ddm1959

    Buying a car vs leasing is the smarter choice because you don’t have to worry about finance charges and also adding debt to your overall monthly budget.
    Instead take about what you would pay in car debt and save it every month,
    Example $500 month yield after one year $6000 plus interest , hence you’ll have money for repairs,