The Difference Between Buying and Leasing a Car
If you are getting ready to buy a car, whether it is your first vehicle or your tenth, you may have questions about your options. There is a lot to think about when purchasing a new car—from the mileage and features to the potential car's technology package. You have many choices when it comes to picking out the right car to meet your needs.
One of the fundamental things that you should understand before you ever head to the lot is the difference between leasing and buying a car. The options may seem similar, especially when a good salesperson presents them, but they have some critical differences that you should consider.
What Does It Mean to Lease a Car?
Most people intuitively know what buying a car means. Leasing a car, however, is not as straightforward. When you lease a vehicle, you do not own it. Instead, you are essentially paying to use the car until the lease term is up—it is a long-term rental agreement.
You may wonder: Why would anyone lease a car when they can buy one? The answer really depends on your personal preferences and your financial situation.
Combating Vehicle Depreciation
One of the main reasons consumers like leasing a vehicle is that they know how much a new car drops in value the second that you drive it off the lot. Owning a car means that you own an asset that only decreases in value.
When you lease the car, you have the option to turn the car back into the dealership at the end of your lease. In that way, you avoid owning a depreciating asset entirely. You simply pay for the use of the car for the length of your lease and do not own anything. The cost of your lease is designed to pay the dealership for the depreciation of the vehicle while you use it.
For someone that plans to get a new vehicle every few years, leasing may make sense. Instead of losing money because of depreciation, you turn in your old vehicle and start a new lease when you are ready for an upgrade.
Cost Differences Between Leasing and Buying a Car
It is also often cheaper to lease a car compared to buying it. On average, the monthly payment for a vehicle lease is about 30% cheaper than making monthly payments to purchase a car over the same or similar time period.
Leasing helps you avoid upfront costs of the purchase of a vehicle, too. You do not have to put anything down to drive off the lot with a leased vehicle. Many car dealerships will require some amount of money down to get the best financing rates to purchase a car. Keep in mind, however, that you will still likely have to pay some fees and registration costs, even when you are leasing.
The vehicle is usually under warranty for the entire term of the lease, too. That means that you can avoid many major car repairs while you are leasing the vehicle because of the typical short lease terms compared to buying a car.
Returning the Vehicle
At the end of your lease, you have the option to purchase the car at a set price, or you can simply turn in the car and end your lease. However, when you end your lease, the dealership will inspect the vehicle to ensure that it is still in pretty good shape. If it has been in an accident or has other damage, they may charge you a fee to return the car.
Some lease arrangements have mileage limitations as well. If you have too many miles, you may have to pay an extra fee when you return the vehicle as well.
The Biggest Difference Between Buying and Leasing: Ownership
When you lease a car, you are renting it; you do not own it. When you buy a car, even when you purchase it with financing that includes monthly payments, you own the car. You can do virtually anything you want to the car when you own it, but you have fewer options when you lease it.
For example, if you lease a truck, you don’t want to spend time and money getting running boards, rims, or adding towing capabilities. Those extra features may have to be removed when you turn in your leased truck and/or you will not get reimbursed for them.
Owning a car also increases your net worth. When you pay off the outstanding balance, it is yours to keep and own outright. The same thing does not happen in a lease—you either turn in the car or buy it from the dealership at the end of the lease term.
In addition, if you keep renewing your lease with another vehicle, those monthly payments will go on forever. When you buy, you own the car after a specific number of payments, which means you can look forward to the days when you do not have a car payment to worry about every month.
Which is Better? Buying or Leasing?
Ultimately, personal preference, lifestyle, and finances will dictate which option is right for you. Although leasing has some advantages, it will end up costing you more than purchasing a vehicle outright in most circumstances. Over the long term, buying a car is the cheapest way to drive.
If you decide you do not want to continue your lease or cannot afford it, you will likely have to pay early termination fees and other penalties. These charges can sometimes be the same as the full amount of the lease payments.
If you are concerned about cost and are leaning toward leasing because of lower payments, check with your local credit union before you decide. They can often get you a good interest rate and payment plan on a car loan, and you may be surprised just how affordable monthly payments can be on your new car.