One of the most common questions I am asked as a financial planner is âshould I lease or buy my car?â Leasing commercials on the radio make it sound like leasing a car is the only cheap, intelligent choice. However, it really depends on how you define âcheap.â If it means a lower monthly payment, then leasing is usually cheaper. If it means what you pay long term, though, leasing is usually not the best option.
Whatâs the Process of Buying a Car?
Buying a car is a relatively straightforward process. Essentially, you negotiate the price of the car at the dealership and you secure financing. After providing a down payment, youâd finance the entire remaining value of the car, usually through a loan from a bank or credit union. You would then make payments that include both principal and interest for a specified period of time. Once your contract is complete, and the loan or other financing is paid off, youâd own the car outright.
At that point, you could decide to keep it or sell it. If you sold it, youâd have to negotiate the sale to get the price you want. One disadvantage of owning the car is that thanks to regular wear and tear and other factors, you have no guarantee of what the car will be worth at the end of the financing period.
How is Leasing Different from Buying?
Leasing is a bit more complicated, but itâs basically just another method of financing a car. The difference is you arenât financing the entire carâjust the use of the car during the first few years of the carâs life. The payments you make would still consist of principal and interest, but only for the portion of the carâs life youâd be using up.
The biggest difference is that unlike buying a car, you donât own anything once a lease is completeâand if you still needed a vehicle, youâd have to acquire another one. Typically, you can purchase the car for a pre-set price (known as the residual value) once the lease term is over, or you can give the car back to the leasing company and decide to either purchase or lease another vehicle.
Do You Have to Pay Extra Fees to Lease a Car?
Many advertised leases also require a down payment. If youâre short on cash, you can skip the down payment, but your monthly payment would be higher because youâd be financing more of the car. Also, keep in mind that youâre still responsible for the condition and mileage of the cars you lease. When you turn the car back in, if it isnât in good condition or if youâve driven more miles than your lease allows (around 12,000 miles per year), then youâll have to pay extra.
When Is It Better to Lease Rather Than Buy?
Before you decide to lease or buy, youâll also need to determine how many miles you drive per year and how long you like to keep your cars. If you are a high mileage driver (say, more than 15,000 miles per year) or you like to keep your cars for three years or more, you are most likely better off purchasing the car. If you donât drive much and you prefer driving new cars, then leasing may be a better option for you.
Regardless of whether you lease or buy, youâll need good credit to qualify for a low interest rate. So before you shop for a car, see where you stand: check your credit score for free at Credit.com.