When it’s time for a new car, one of the most important considerations is whether to buy or lease. Both options have benefits and drawbacks. In this article, automotive industry expert Rory Angold explores the pros and cons of buying and leasing.
Advantages of Buying
Buying and financing a new car typically results in lower costs over the long term. Even though monthly payments on a lease are typically smaller than loan payments, the loan payments build up some equity in the car over time. Each payment includes payment of interest and the principal amount of the loan. If you keep a car that you have financed long enough, you may get years of use from the car after it is paid off.
When you purchase, you have the right to sell or trade a car at any time. You do have to pay off the balance of the loan with the proceeds, but you are never locked into a set term if you decide you would rather have a different car. Also, you have no limitations on mileage when you purchase and finance a car. While additional miles will impact the car’s market value, you are in control of how many miles you put on the vehicle without a separate financial penalty.
If you purchase a used car instead of leasing a new one, you can take advantage of the depreciation that occurs on every new vehicle during its first 2 or 3 years of use. It is much easier to seek out great deals on a car that you purchase rather than going with a new car lease.
Disadvantages of Buying
Financing the purchase of a car involves substantial interest payments. Short term (2 or 3 years) interest expense can be much more than the interest-equivalent of a lease contract over the same term. The key to making a loan worthwhile is keeping the car long enough to pay the loan off. Car sales also usually involve substantial sales tax expense compared to a lease contract in most locations. A purchased car’s warranty also expires at some point, and if you keep the car past its warranty, you will run the risk of substantial repair expenses.
Advantages of Leasing
Car leases usually have a much lower monthly payment than car loans. Leases have much lower requirements as well for down payments as compared to loans, and there is no up-front sales tax expense. Unlike car loans, lease agreements will not leave you “upside-down” on financing. In other words, the lease contract is scheduled to zero out at the end of the term. With a car loan, the entire loan balance must be paid when the car is sold, and if the balance due on the loan exceeds the value of the car, you will have to come up with the difference to clear the loan and sell the car.
Leases also typically involve fewer expenses for repairs. Leases include a manufacturer warranty throughout the lease term for covered repairs. Routine maintenance and insurance expenses are the same with leases and loans, however.
You do not have the hassle of selling a car when a lease agreement ends. You simply return the car and do not have to deal with working out a trade-in or sale value. For buyers with difficult credit, leasing companies are usually easier to work with as opposed to lenders who may demand very high-interest rates and other conditions.
Disadvantages of Leasing
The most important thing to understand is that when you lease a car, you do not own the car. The lease contract has mileage limitations, and if you exceed the allowed number of miles, you will face substantial charges for each extra mile. There is no financial benefit for staying under the number of allowed miles. Any alterations or improvements you make to the car do not provide any benefit when the lease is over, and you will likely be required to remove any alterations and return the car in its original condition as it was when it was first leased. Unlike owning a car, your lease payments do not build any equity in the vehicle. When the term is up, you return the car and do not receive any trade-in or sales value.
About Rory Angold
Rory Angold, Executive Vice President at United Car Care, is the leader, the manager, the financial expert, and the insurance advisor all car dealers would want to have on their team. He has a knack for risk management, sales, and finance, all paired with a leadership mentality that makes him the ideal strategic consultant. He will help you devise and execute a detailed strategic plan to achieve both short-term and long-term goals.
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