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The choice between buying and leasing a car is often a tough call. On the one hand, buying involves higher monthly costs, but you own an asset-your vehicle-in the end. On the other hand, a lease has lower monthly payments and lets you drive a vehicle that may be more expensive than you could afford to buy, but you get into a cycle in which you never stop paying for the vehicle. With more people choosing a lease over a loan than they did just a few years ago, the boom in leasing isn’t stopping anytime soon.
You borrow money from a bank, credit union, or other lending institution and make monthly payments for some number of years. A chunk of each payment is put toward paying interest on the loan and the rest is used to pay down the principal. The higher the interest rate, the higher the payment. As you repay the principal, you build equity until-by the end of the loan-the car is all yours. You can keep the car as long as you like and treat it as nicely-or poorly-as you want to. The only penalties for modification or abuse could be repair bills and a lower resale value down the road.
As car prices rise (edging past $46,000 at the end of 2021) and buyers start to demand the latest safety features that are available only on newer cars, leasing a vehicle has become a mainstream alternative to buying. With a lease, https://installmentloansgroup.com/payday-loans-mi/ buyers make a monthly payment to drive a new car for a set term. That payment is often less than the monthly cost of financing a new vehicle, but buyers must return the car at the end of the lease term.
With more people than ever working from home, the mileage restrictions on a lease may not be a factor for a lot of shoppers. Quite the opposite: Many might find they don’t use the miles they have paid for.
The predictability of the payments and ownership costs (no expensive repairs when under warranty!) has its appeal. However, life can be unpredictable, and a lease has less flexibility than a purchase.
To find out whether leasing or buying is right for you, we take a look at the pros and cons.
The Upside of Leasing
On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back any principal. Instead, you’re just borrowing and repaying the difference between the car’s value when new and the car’s residual-its expected value when the lease ends-plus finance charges.
- You drive the car during its most trouble-free years.
- You’re always driving a late-model vehicle that’s usually covered by the manufacturer’s new-car warranty.
- The lease may even include free oil changes and other scheduled maintenance.
- You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
- Your vehicle will have the latest active safety features.
- You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.
- There could be significant tax advantages for business owners.
- At the end you just drop off the car at the dealer.
Disadvantages to Leasing
• In the end, leasing usually costs you more than an equivalent loan because you’re paying for the car during the time when it most rapidly depreciates.
• If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.