Leasing vs. Buying a Car: What a Smart Shopper Should Know
There’s nothing quite like the feeling of driving a brand-new car.
It’s more than the new-car smell. It’s knowing that no one has ever driven it — other than maybe a test cruise or two — before you. But a new car can be expensive, which makes it out of reach for many drivers.
While buying a used car is one option, another way to get behind the wheel of a new vehicle without buying it outright is to sign a lease.
The 2022 Reality of Car Shopping
The pandemic has put a dent in the usual car buying decision making, and that’s mostly because there is a shortage of new cars. The global microchip shortage plus a slow down in production during the height of the pandemic have severely affected inventory.
Through 2021, and now into 2022, experts say buyers should expect to pay full sticker price so if you can hold off on buying a car, do. According to Kelley Blue Book, the average new car cost $46,404 in January 2022. That’s up 13.6% from January 2021. That’s because, in addition to consumers choosing SUVs and trucks over cars, dealers no longer have to offer discounts in order to sell cars.
In addition to higher prices, you’ll also be waiting longer to get the car you want. Whether you lease or buy your next car, you may have a wait of three to six months before it reaches you due to high demand and low supply.
In all likelihood, you’ll be ordering your car to be custom-built rather than choosing one from the dealer lot. J.D. Power says that the average vehicle is at the dealership for 26 days before being sold, compared to 62 days pre-pandemic.
If your family is considering going to one car, now may be the time. Dealers are eager for used cars to sell and are paying top dollar. If you are leasing now, there’s a chance the dealer may want to end your lease early by buying out the remainder of it. These are good options if you don’t need a replacement car.
Leasing vs. Buying a Car: What’s the Difference?
Pandemic or no pandemic, both buying and leasing have their pros and cons, and the right option for you depends on a variety of factors. Learn more about the difference between leasing and buying a car to determine which makes the most sense for you.
What Is Leasing?
When you lease a new car, you are essentially renting it from the dealership for a specific period of time. The dealer retains ownership of the car while you pay a monthly fee to drive it.
Because monthly payments are based on depreciation rate rather than the total value of the vehicle, lease payments are often lower than a finance payment if you take out a loan to buy a new car.
Once your lease is up, you’ll either return it to the dealership and start a new lease on a different car, or you may choose to buy the car from the dealership if you don’t want to return it. In this case, you’ll have to pay for the residual value of the car. Often, the lease agreement includes the price of how much you’ll pay if you decide to buy the car.
In today’s market, that might work in your favor if you choose to buy the car at the end of your lease. That’s because the price will be based on the car’s residual value when you signed the lease.
And, if you leased your car pre-pandemic or even in the first year, you can almost guarantee that its residual value is higher now than it was then, which means you could get a pretty awesome deal on an almost-new car. And if you didn’t drive much because you worked from home, the mileage could be quite low.
The flip side of that is that if you want to turn in your lease and lease another new car, you might have trouble finding one.
Just like with buying, you can negotiate a lease amount. Here are tips on how to negotiate a lease deal successfully.
What Is Buying?
When you buy a car, the ownership transfers from the dealership either to you directly (if you pay for the vehicle outright) or to the lender (if you take out a loan to finance the vehicle purchase). That means the car is yours to do with what you want, whether that’s driving it long distances on a regular basis or making modifications to the car’s appearance or performance.
Pros of Leasing a Car
Lower Monthly Payments
Car lease payments tend to be much smaller than payments on a car loan. That’s because you’re only covering the car’s depreciate during the lease contract term, which equates to a lower monthly cost.
Smaller Down Payment
In general, down payments for leases are smaller than they are for car financing. Depending on the dealership and your credit history, you may even be able to find a lease deal with no money due at signing.
Because your payments are smaller, you can typically afford to lease a higher-end vehicle than if you’re buying. That means you can afford the latest technology and premium features like leather seats with a lease that might be outside your budget if buying.
Most new cars come with warranties that cover at least the first three years, which coincides with the average lease term. If something goes wrong with the vehicle while you’re leasing it, repairs will likely be covered under warranty. Some leases may also offer fully paid maintenance for the duration of the lease.
When it comes time to trading in a car you own, you have to worry about finding a good deal, or even go through the hassle of selling it privately. When it comes time to get a new vehicle at the end of the lease, all you need to do is bring it back and choose a new ride.
But remember that it’ll be easier said than done with today’s supply and demand problem, so if you plan to sign a new lease it’s smart to start the process about six months before your lease ends to ensure you have a car.
Cons of Leasing a Car
Limited Options for Bad Credit
If you have a low credit score, it might be hard for you to find a leasing company or car dealership willing to sign a lease agreement with you. Even if you do find a lease, you’ll probably be required to pay more at signing and your monthly payment will be higher.
Although you are making monthly payments on your lease, that money doesn’t go toward building any equity in the car. Therefore, when you turn the car in and look for a new car to lease, you won’t be able to use that equity as a down payment. Most leases require money down at signing, which is extra money you need to find if you don’t have a car to trade in.
No Room for Customization
As a lessee, you can’t make any modifications to your car. If you want to personalize your ride, leasing isn’t the right route for you. Any changes you make to the car must be reversible if you want to avoid a ton of unexpected fees at lease end.
Car leases come with certain limitations, one of which has to do with mileage. The lease contract will state the maximum number of miles you may drive, and if you exceed that number you’ll need to pay an extra fee for each mile driven. The mileage cap and the excess mileage fee will depend on several factors, including the type of car you’re leasing and who you’re leasing it from.
Before signing a lease agreement, make sure you know how many miles you drive on average so you’ll know whether or not the mileage restrictions are realistic.
If you choose to end your lease early, you may have to pay early termination fees. If you are confident that you’ll keep the vehicle for the duration of the lease this shouldn’t be a huge concern, but if circumstances beyond your control (like a job loss) occur, you might find yourself paying more out of pocket than you counted on for early termination.
However, it’s likely that the dealership will begin contacting you up to three months before the lease is over. They want your business to continue. If you agree to trade-in the car for a new one lease in this situation, there will be no early-termination fee.
When you return the vehicle when your lease ends, the dealership will give it a thorough inspection or you will arrange for this yourself with an independent inspector. The dealership will provide this information to you.
The car must remain in good condition with only normal wear while you’re leasing it; if you return it with excessive wear and tear you will be liable for these costs. That includes keeping the interior clean and avoiding exterior damage.
Pros of Buying a Car
The Car Is Yours
When you buy outright or use an auto loan to finance a car, the car is yours to do with what you want. That means you can adorn it with bumper stickers, get some sweet aftermarket accessories or even paint it bright purple if you want. It also means that, when it comes time for a new car, you can either trade in your vehicle or sell it and use the proceeds as a down payment on your next ride.
No Mileage Limits
If you drive a lot for business purposes or go on frequent long-distance trips, buying a car is the best option for you. With a lease, you would likely end up exceeding the mileage cap and having to pay more at the end of the lease.
Car Payments Have an End Date
Many people take out a loan to buy a new car, and during that time you’ll have a monthly payment. But eventually that loan balance will be $0, and once you’ve paid it off you’ll be free from car payments. That means more disposable income each month to save or spend on what’s important to you.
Bad Credit Is Less of an Issue
In general, there are more financing options available to car buyers with subprime credit than there are lease deals. You’ll still likely have a higher interest rate than a borrower with a good credit score, though.
Cons of Buying a Car
Higher Short-Term Expense
Although your car will eventually be paid off, you will likely end up paying more in the short term when you buy a car. Monthly car payments are higher than lease payments because you’re financing the entire value of the vehicle rather than the amount of depreciation during the lease term. You may also need a bigger down payment when buying a car compared to leasing.
Higher Taxes and Interest
With car buying, you’ll pay sales tax on the price of the vehicle, which can be a significant chunk on top of the purchase price. You’ll also need to pay interest on the amount you’re financing. With a lease, you’ll only pay tax on your down payment and your monthly payments, and you’ll only pay interest on the depreciation amount.
Your Warranty Will Run Out
New car warranties only last for a specific term. After that, it’ll be up to you to pay for any repairs yourself. Alternatively, you can opt for an extended warranty, but that costs more money at the time of purchase which may mean choosing between an extended warranty or a less expensive car.
When weighing up the pros and cons of leasing vs. buying a car, it’s important to think of your personal needs and financial situation so you can make the best decision for you and your family.
Ohio-based Catherine Hiles is a British writer and editor living and working in the U.S. She has a degree in communications from the University of Chester in the U.K. and writes about finance, cars, pet ownership and parenting.