Buying a car — especially if you’ve never done it before — can be overwhelming. The different makes, models and options are complicated enough, but deciding whether to lease or buy can be especially confusing. It doesn’t help that car dealerships make things as opaque as possible, leaving you without clear details to make the decision.
Before you go out and get a car, find out the difference between leasing and buying to ensure you make the right choice.
What is Leasing?
When you lease a car, you’re essentially renting it for a long period, often between 24 and 48 months. After that time period, people typically return the car and lease a new one. For some people, this suits their lifestyle. They get to always drive new cars, and the upfront costs are lower than buying a vehicle. If your finances are not in great shape, it’s also easier to get approved to lease a car than it is to buy one. The monthly cost is typically cheaper than buying, so in the short term it appears to be a better deal than buying.
It sounds straightforward enough, but fees and fine print often complicate things.
On paper, leasing a car often costs less than a monthly car payment. However, car dealers charge leasers beyond the monthly payment.
For example, if you drive beyond a certain milestone — it depends on the lease agreement, but 10,000 miles a year is typical — then you’re charged extra for each and every mile. The fees vary but are often in the ballpark of 15 to 25 cents a mile. If you’re using the car often and the mileage fee is 20 cents, driving an extra 10,000 miles in the year will cost you $2,000.
Another way leasers are charged is on wear and tear fees. If you’re prone to dinging up your car with minor scratches and scrapes, then you’ll be expected to pay for the damage since you don’t actually own the car.
Read the Fine Print
When leasing, there are typically two types of agreements: an open-end and a closed-end. The closed-end is the most common and involves returning the car at the end of an agreement. An open-end lease is more of a “rent to own” agreement, where you’re leasing the car and then agreeing to buy it after the lease is up. According to Investopedia, closed-end leases are the most consumer-friendly option because they’re less risky.
One appealing aspect of leasing is the relative freedom, as once the lease is up you can come in and pick out a new car to lease. The downside is if you want to terminate your lease early, then you might end up paying a penalty for not finishing your lease as stipulated in the agreement.
The Benefits of Buying
In almost all cases, buying a car is cheaper in the long run than leasing a similarly classed vehicle. It sounds like buying over leasing is a no-brainer, but there’s a reason why leasing is so popular. A monthly car payment costs more in the short term, which turns off many buyers
Edmunds breaks down the finances brilliantly by using a 2015 Honda Accord EX as an example. The car goes for $25,000 new or can be leased for three years at $339 a month. After six years, the cost of leasing that vehicle would come to $24,161, while the total cost of buying it with interest added up is $28,757.
Leasing sounds pretty appealing now, right?
However, the leaser doesn’t actually own anything of value once the lease is up. The buyer of the new vehicle has a car worth $11,000. The owner can continue driving the car for years after at no additional cost (aside from repairs) or sell the vehicle. When you factor in the value of the car, the buyer spent 27 percent less than the leaser.
Used or New: Which to Choose
The big decision when buying is to go for a new vehicle or a used vehicle. If you’re willing to settle for a vehicle from a few years ago, then buying used is the frugal option. Vehicles made in the past few years are better made than cars of the past, according to CNN, so buying a used vehicle means there are fewer mechanical problems than there once was.
To Lease or to Buy?
The decision really comes down to what your lifestyle is like and how important finances are to you. If you can afford it at the moment and are willing to plan long term, then buying a vehicle is far superior to leasing. If you like low upfront costs and want to upgrade your vehicle every few years, then leasing is probably the way to go.