It’s an interesting time to be a first-time buyer, let alone a first-time buyer asking yourself if you should lease or buy a new car! Because the industry has been plagued by shortages and record-high prices, it’s more important than ever to take the optimal financial path. That said, the best option for you will really depend on your unique situation.
Key Takeaways
- Benefits of leasing include paying a lower monthly payment, driving a nicer car than you can afford to purchase outright, and getting a new model every few years.
- When you lease, you don’t own the car, so you’ll need to obey the terms of your lease (such as mileage limits) and return the car to the dealership at the end of your lease.
- Benefits of financing (or purchasing your car outright) include greater freedom (no mileage limits, for example) and being able to sell or trade-in your car.
- When you purchase your car, you’ll be responsible for any maintenance or repair costs not covered by your warranty.
The Benefits of Leasing a Car
When you lease, you agree to drive the car for a specific length of time, often for 36 months. And you only pay for a vehicle’s depreciation during your lease term, so you ultimately pay a lower monthly payment than if you were financing a car.
Because a lease offers lower payments, drivers can typically afford to lease a much nicer car than they could buy. In fact, this is one of the main draws of leasing over financing!
At the end of your lease, you have the option to purchase the vehicle for a pre-agreed price. If that pre-agreed price turns out to be less than the market value, you’ve got yourself a great deal. If it doesn’t, you can simply walk away. You’re then free to lease a newer model.
And that brings us to another popular reason for leasing: you get to drive a brand new car every two or three years. Besides simply enjoying a brand new vehicle, there are also practical reasons to switch vehicles more often. Perhaps your kids are going to college soon, and a smaller vehicle would be more practical. Or perhaps you’re expanding your family, and you need more seating.
Thanks to manufacturer warranties, you’ll likely enjoy powertrain and bumper-to-bumper coverage throughout your entire lease term. And that means more peace of mind, since you’re unlikely to incur any unplanned expenses!
Should I Lease?
To lease a vehicle, you typically need a good credit score. In addition to making monthly payments, you’ll also need to make a down payment. And you’ll need to pay taxes and registration fees, too, though taxes can be financed and included in your monthly payment. Often, a dealer will also charge an acquisition fee. Making a down payment will lower your monthly payments. However, some dealers offer zero-down lease agreements.
Today, leasing can still help you secure a lower monthly payment than financing. However, you should also know that there have been fewer models available to lease on the current market. These shortages have driven up the cost of leasing in general. But the fundamentals of leasing remain the same!
Remember, during your lease, you don’t own the car. That means you don’t have any equity in it, even though you have the option to purchase the car when your lease is up. Your lease agreement will also include limitations as to what you can do with the car, such as mileage limits.
The Benefits of Buying or Financing a Car
When you finance a car, you take out a loan to pay for it. And when you’re finished repaying the loan, you will own the car outright. You can reduce your monthly payment (and the overall amount of loan interest you pay) by making a larger down payment toward your new car.
Compared to leasing, owning a car can ultimately save you money, since you won’t have to pay any more monthly payments once your loan is paid off. You’ll also own equity in a car you purchase, so you’re free to sell it (or trade it in for a newer model).
Buying a car means you’re free and clear of any limitations a leasing agreement would impose. For example, you can put as many miles on your car as you wish. And you won’t be penalized for any cosmetic damages to the vehicle, such as scratches in the exterior paint or tears in the upholstery.
Should I Buy?
Ultimately, if you want to own your car, or if you do a lot of driving, financing is your best option. To finance a car, you’ll need to save a down payment and secure a loan.
Since new and used car prices have reached new heights in recent years, it’s important to stay ahead of your own finances. In other words, you don’t want to owe more on your car than it’s actually worth. While many drivers have been turning to longer loan terms (up to 84 months) to reduce a monthly payment on a steeper loan, keep in mind that doing so will force you to pay much more money in interest (compared with a 60-month loan term, for example).
New cars come with warranties, so you’ll enjoy a period of coverage. However, once the manufacturer warranty runs out, you’ll be responsible for the cost of any necessary maintenance or repairs.
Leasing vs. Buying a Car
In the end, the decision to buy or lease will depend on the driver. If you want a lower monthly payment and don’t mind never owning your car, leasing is an excellent choice. On the other hand, if you want to own your car once your loan is paid off and you don’t mind paying a higher monthly payment, buying a car is the right path for you.