Buying vs Leasing a Car
If you’re looking for a new car, then you’ve probably run into the issue of whether to buy it or lease it. There are benefits and drawbacks to either approach so, to help you with your decision, we’ve put together the following tips.
The One-sentence Answer
Here’s the short answer: If you want to drive a newer car and plan on upgrading every 2-3 years, then leasing is the way to go; for almost everyone else, buying is the better alternative.
If that one sentence simply isn’t enough—and we don’t blame you if you’re itching for more info—then see the rest of the article. It’ll help explain the differences between the two approaches.
Whether you are leasing or buying, you will probably need a down payment of some kind. How large your down payment is can usually be negotiated, but realize that the smaller the down payment, the larger your monthly payment will end up being. And, if you are getting a loan, then you may also see an increase in your interest rate.
You should also know that leases have a couple of additional up-front costs, including the first-month’s payment and a refundable security deposit.
The monthly payment is where you will see the biggest tradeoff between leasing and buying. Leasing generally has much lower monthly payments than buying.
Why is that, you may ask? Well, when you buy a car you have to finance the entire vehicle. With a lease, you are only paying for the anticipated depreciation of the vehicle during the term of the lease.
Here’s a sample comparison that may help:
|Term||Car Value||Depreciation||Monthly Payment|
|Buy||5-year loan, 3.5%||$30,000||–||$546|
Note: Calculations do not include a down payment, sales tax, registration, or other fees/costs associated with a vehicle lease/purchase
Although the monthly cost of buying a car is usually much higher than leasing one, that monthly payment goes away after the loan has been paid off. If you want long-term financial freedom, then purchasing a car and paying off the loan is the way to go. Then you’ll be free to drive the car until the engine falls out.
If having a lower monthly payment is important to you, then leasing is probably the better option. For example, you may want the additional monthly cash flow for investing, retirement, or something else.
After your lease is done you’ll most likely need to renew the lease, or look for another vehicle, so your monthly payment will not go away.
When you hit the point that you are ready to move on to your next vehicle, your options are much different depending on whether you have leased or purchased your car.
If you have an active lease, then you will need to turn in the car and, if you are terminating the lease early, you will have to pay a hefty early termination fee. You may also pay additional fees if you turn in your leased vehicle with any damage that the dealership considers beyond typical wear and tear.
If you own the car, then you can do whatever you want with it, from selling it to trading it in. Hopefully it goes without saying, but if you still have a loan on the car, then you’ll need to fulfill that obligation before you can sell it.
One important factor for choosing between leasing or buying is how much you tend to drive. Leases allow for a certain number of miles. If you go over the allotted mileage, then you will be assessed additional fees when your lease ends.
Hopefully these tips have helped you understand the differences between leasing and buying a car. If you are looking to buy, and need a loan, then you can call us at: 1-800-326-3328, M-F, 9 am-7pm, Sat. 9-2pm, or visit a Deseret First Branch or Click Here to apply.
Membership and eligibility required. OAC.