Have you ever been in the market for a new vehicle and wondered whether you should buy or lease? In recent years, leasing has become very popular and carries some definite advantages. Before deciding whether to lease or purchase a vehicle, there are a number of important factors to be considered. At the very least, examine your options so that your next car makes the best financial sense for your personal situation.
A primary consideration is to evaluate how long you intend to keep the car. If you are the type of person who likes to have a new car every few years, leasing may the better option. It does not mean it will be the cheaper option. However, if having a new car regularly is important to you, it can save you the hassle of always trading in or possibly selling your car for a loss if you owe more than it is worth.
Perhaps the greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Leases require little or no down payment, monthly payments are usually lower, and you get the pleasure of owning a new car every few years. With a lease, you are essentially renting the car for a fixed number of months. You pay only for the use (depreciation) of the car for that lease period, and you are not forced to absorb the full depreciation cost of the vehicle. For business owners, leasing a car may offer tax advantages if the vehicle is used for business purposes. If you are deducting a portion of your car’s depreciation from your taxes, you will be able to deduct substantially more if you lease. The IRS does, however, limit depreciation deductions for certain luxury cars.
By leasing a car, you always have a car payment. If that does not sound ideal, then leasing is probably not right for you. As long as you lease, you will never really own it. When your lease term is up, you either hand the keys over to the car dealership and look for another vehicle, or finance the remaining value of the vehicle and go from making lease payments to making loan payments. The mileage restrictions of leasing pose another drawback. If you drive a great deal during the year, consider a loan or an open-end lease. Finally, insurers usually charge higher coverage costs for leased vehicles. However, depending on your age, driving record and place of residence, that additional cost may be nominal.
By far, the greatest benefit of buying a car is that you may own it one day and be free of car payments. The car is yours to sell at any time, and you are not locked into any type of fixed ownership period. When you buy a car, the insurance limits on your policy are typically lower and you are free to rack up mileage without economic penalties or restrictions.
The most obvious downside of owning versus leasing is the monthly loan payment, which is usually higher on a purchased car. Additionally, car dealers usually require a reasonable down payment, so the initial out-of-pocket cost is higher when buying a car. When you purchase a car, your payments reflect the whole cost of the car, which are usually amortized over a period of time. Naturally, depreciation can take a toll on the value of the car, which is especially true in the first few years. Like the payments of a mortgage, monthly car payments are divided between paying principal and interest, which can vary from payment to payment. In the first years in which you pay back your car loan, the majority of each payment goes toward interest rather than the principal.
In the end there isn’t a right or wrong answer and it really depends on what you need out of your vehicle, driving habits, and budget. Before you make your next vehicle purchase, be sure to go through all of your options and see what makes the most sense for you.