Cars are an integral part of just about everyone’s life, to say the least. For most people, owning a car will be a necessity that can’t be avoided. But there are multiple things to consider before taking that step. This includes things such as choosing the right brand and model, and how you decide to pay for the vehicle, either by buying or leasing it.
Buying a car is currently the most popular option. Buyers can either pay in cash or take out a car loan and pay the installments over time. Whichever the choice, the buyer ends up owning the vehicle and has more flexibility in its management.
The biggest advantage of buying a car is acquiring equity which can later be used as trade-in value to purchase the next vehicle. However, cars are depreciating assets and even a brand-new car can lose as much as 9-11% of its value from the moment it is driven off the lot. One way to get around this is by choosing a brand and model that can hold its value well.
Another disadvantage to buying a car is that once the warranty period expires, you will be solely responsible for all maintenance and repair work. This can be pricey depending on the make/model of the car, as well as how well it has been treated.
Leasing a car is essentially the long-term version of renting it. A leasing agreement usually spans over a 3-4 year period where the obligor pays periodic payments to a car dealership in exchange for borrowing the vehicle.
The biggest appeal of leasing is its affordability. Leasing costs are lower upfront but only make financial sense if the lease period does not extend beyond the usual 3-4 years. According to Experian’s Q1 2021 State of the Automotive Finance Market report, car loans are on average $108 more expensive than lease payments. However, over time leases will get more expensive and can end up significantly exceeding the cost of buying a car.
Another drawback of lease agreements are the strict limitations on how you can use your vehicle. This includes mileage limits as well as vehicle maintenance. Furthermore, leasing agreements can be quite complicated and unless you do your research, you could end up paying more than expected.
Buying vs Leasing
When it comes to buying a vehicle, consumers tend to work with their bank to secure a car loan and purchase the vehicle. Many banks have specific requirements with the level of insurance required on the car, and some may even require Gap insurance. Gap insurance is basically insurance coverage that helps you pay off your auto loan if your car is totaled or stolen and you owe more than what the car is worth. The primary issue with a car loan is that due to the steep depreciation of vehicles, many borrowers can end up upside-down. This means that they actually owe more than their car is worth. So if you plan on selling or trading in the car before it’s paid off, you may have additional costs beyond the value of your car.
Leasing, on the other hand, doesn’t require a car loan. This means that you are only obligated to pay up to the contract date and then you can hand over the keys. This makes it an excellent option for those that prefer to have a new car every few years. However, if you have a long commute to work or just tend to drive more than the average person, leasing is not a good option for you since you will likely exceed the dealership’s mileage limits. And lastly, leased vehicles can also be purchased at the end of the contract.
Which is a better use of your money?
Buying a car is typically a much better investment than leasing it. While it involves more upfront money, there is more long-term value to be gained from owning a vehicle. Whether you choose to eventually sell or trade-in the car, this will make your next purchase more affordable.
Car leases can be a good option for some people that are willing to pay up to always have a brand new car, and are able to stay within the dealership’s limits. However, this cost would eventually exceed that of buying the same vehicle. Regardless of which option you choose, you should first make it a point to understand your needs and do some research before making your choice.