Leasing vs Buying a Car: What You Need to Know When Shopping for a New Car

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Leasing vs Buying a Car: What You Need to Know When Shopping for a New Car
Penny Hoarder writer Lisa Rowan's new Hyundai Accent pictured in St. Petersburg, Fla. Heather Comparetto/The Penny Hoarder

New cars come with a certain prestige.

That new car smell, shiny exterior and the knowledge that no one has eaten their lunch in it is enough for some to justify the cost. While buying a used car might be cheaper in the long run, sometimes the peace of mind that comes with a new car wins out.

So when you’re weighing whether leasing a car vs. buying is the best deal, here are some things to consider.

Leasing vs. Buying a Car: What’s the Difference?

When you buy a car, you’re paying for the entire value of the car. Not including down payment, interest and fees, if you buy a $36,000 car and finance the entire amount over 36 months you’ll have a $1,000 monthly payment.

In a lease, you pay back only the depreciation of the vehicle. A $36,000 car will lose half its value in three years so without a down payment, interest and fees, you’ll pay $18,000 over 36 months equaling a $500 monthly payment.

At the end of the 36-month lease, you can opt to buy the car for the remaining balance or turn the car in and walk away. But 36 months after buying a car, you could own the car outright, have years of payments left or be upside down in it, depending on your loan terms.

Leasing a Car: The Pros

With a car lease, you can drive the latest model off the lot with little to no down payment. And you don’t have to worry one iota about the 10-20% it just dropped in value!

Monthly lease payments are usually lower than buying a car and besides routine maintenance costs, all maintenance is covered by the dealership. In a typical three-year lease, you’ll also be able to take full advantage of the manufacturer’s bumper-to-bumper warranty.

At the end of the lease, you drop it off and walk away — or drive away. If you decide to buy the car at the end of your lease, any principal you paid will go toward your purchase of the car.

Leasing a Car: The Cons

One word: fees.

Acquisition fees range between $250 and $1,000, disposition and early termination fees range between $200 and $450, and wear and tear fees —which are at the discretion of the dealer — that run you between $100 and $200. Mileage is usually capped at 12,000 to 15,000 per year. If you go over that, you’ll pay a fee of about 15 cents to 30 cents per mile.

Then there are the increased expenses. Interest rates, called rent charges, are higher for leased vehicles, as are insurance premiums. And you might also be required to put down a security deposit.

Whew.

The biggest con is that when your lease is up, you’ll have no car and no equity to put into a new one.

Buying a New Car: The Pros

The major pro to buying a new car is that it’s cheaper overall than leasing. The six-year cost of buying a new car is an average $5,059 less than to lease a car for two cycles of three years.

When you buy a new car, you can drive it as long as you want, and at the end of the loan term, you’ll have no more payments. That means you’ll pay less for insurance and have more money for other financial goals.

And while leased cars are usually base models, a car you own is fully customizable to your needs. When you decide you’re done with that car, you’ll get any equity in the sale to put toward your next purchase.

Buying a New Car: The Cons

Besides that roughly $2,500 your car will lose in value as soon as you drive your car off the lot, you could end up owing more than it’s worth if you take out a longer loan. If you need to sell while you’re upside down, you’ll either have to pay the difference out of pocket or roll the negative equity into your next car.

You’ll be responsible for all maintenance, and the manufacturer’s warranty will usually expire after three to four years or 50,000 miles. And while there’s no fee for excessive wear and tear, it will affect the resale value.

Another factor to note is that while interest rates appear low in ads, in reality, you usually pay more than the advertised rate because of your credit and the length of the loan.

Leasing vs. Buying a Car: Which One’s For You?

Leasing allows you to drive a new car every few years for an affordable price without worrying about lost equity or maintenance. So if you’re more interested in new technology and low monthly payments, a lease is the right move for you.

But if you’re a true Penny Hoarder, you’ll probably want to buy vs. leasing a car. Take out a loan of less than five years, and make your payments every month. You’ll end up with no car payments and save on interest in the long run.

And trust me when I say driving a car you’ve paid off feels so good.

Jen Smith is freelance writer and passionate used car purchaser. Visit her blog at SavingwithSpunk.com, or say hi on Twitter @savingwithspunk.