You are ready to get a new car, but you wonder, should you buy or lease it? Buying means you pay full price for the car and car leasing means you pay a fraction of the sticker price, but don’t own the car. Is it better to pay less or buy it outright?
How to Buy a Car
If you buy a car, you pay for it either in cash upfront or with financing. If you finance the car, you don’t own it until you pay the loan off in full. The bank holds onto your title until you make your final loan payment. When you buy a car, you negotiate the price of the car, negotiate a price for your trade-in (if you have one), and determine the amount you’ll put down on the car.
You pay the full negotiated price of the car over the term of the loan. If you decide to sell the car before it’s paid off, you must pay the bank the proceeds of the sale and any difference if you come up short. You keep the car as long as you want or sell it when you desire – there’s no contract telling you when you have to dispose of the car.
How to Lease a Car
If you lease a car, you pay the car’s anticipated depreciation over the lease term. Of course, there’s also the dealer’s fees and interest. Most dealerships require a down payment and then the remainder of the contract price is spread out over the lease term.
Just like when you buy a car, you should negotiate the overall price. The capitalized cost, as it’s called, is what determines your lease payments along with the money factor (aka interest rate). You’ll also need to know the fees, including the acquisition and disposition fees. The acquisition fee covers the cost of obtaining the vehicle (administrative work, creating the lease, finding the car, etc.) The disposition fee covers the cost of cleaning the car and taking it back into inventory.
Keep in mind, when you lease a car, you should have gap insurance (unless the lease company provides it). Gap insurance covers you in the event of total loss or theft. If either occurs and you don’t have gap insurance, you may on the hook for the amount still owed on your lease contract, which could be thousands of dollars.
Getting the Most for Your Money
Before you buy a car, get pre-approved for a loan. You don’t have to secure financing from the dealership. Check out your local banks or credit unions or even try online lenders. Get at least three quotes and compare your options. Choose the loan that offers the lowest interest rate and fees as well as favorable terms.
Whether you buy or lease a car, learn to negotiate. If you buy, do the following:
- Negotiate the sales price of the car
- Negotiate the financing terms (either with the dealer or another entity)
- Ask about incentives (cash-back, 0% APR, etc.)
- Negotiate the cost of your trade-in
If you lease, do the following:
- Negotiate the overall price of the car
- Negotiate your trade-in cost
- Ask about incentives (low money down, lower fees, etc.)
- Negotiate the lease terms
Advantages of Buying a Car
Even though buying a car seems to cost more, it has its advantages:
- You earn equity in the car with every loan payment you make plus the money you put down on the car. When you sell the car, you keep the difference between the sales price and the loan payoff amount.
- You can sell the car whenever you want; there aren’t any contracts saying otherwise or penalties for doing so.
- You can drive as much as you want; there aren’t any mileage restrictions.
Advantages of Car Leasing
- Lease payments are lower than car payments typically. You only pay the depreciation amount over the term of the lease.
- You don’t risk the car lose value, leaving you owing more than the car is worth. You don’t pay the car’s price – only its depreciation amount.
- You may pay less in repairs since most leases are covered under manufacturer warranty for the lease term.
- You may get a new car every few years at lease turn-in time.
The Disadvantages of Buying a Car
- You pay more interest. You’ll pay interest on the full cost of the car over the life of the loan. The longer you borrow the money, the more interest you pay, inflating the car’s final cost.
- You pay sales tax on the full cost of the car. This increases the final cost of the car and the amount you finance.
- Cars depreciate quickly. You’ll lose 20% of the car’s value as soon as you drive it off the lot and it will continue to depreciate over time. You may end up ‘upside down’ on your loan at some point.
The Disadvantages of Car Leasing
- Your mileage is restricted. If you drive more miles than in your contract, you’ll pay an excess mileage fee, which can get costly (up to 30 cents a mile).
- You don’t earn equity in the car. When you turn in a lease, you have to come up with another down payment for your next lease or car purchase.
- You need great credit. Lease companies take a risk leasing you the car since they still own it. Great credit shows that you are responsible, and therefore a better risk for a lease.
Should you Lease or Buy a Car?
There isn’t one answer that’s right for everyone. If you don’t drive a lot and love getting new cars every few years, leasing may be right for you. On the other hand, if you drive a lot of miles every year, love to customize your car, or prefer to drive a car until it’s no longer drivable, buying is a better choice. Of course, the amount you have to pay down on the car, as well as your credit, will also help determine your choice.