There are several factors to consider when deciding to buy or lease a car, as both options have several benefits and downsides. For example, in addition to the monthly lease or loan payment, you need to consider how much you plan to drive, how often you'd like a new car, and if you plan to customize.
Benefits of buying a car
There are several advantages to owning a car, as opposed to leasing. Here are just a few of the most important ones:
- You own the asset -- Assuming that you finance the car, it can take a few years to build up any serious equity (where you owe less than the car's value), but eventually you'll have an asset that can be sold or traded in if needed.
- No payments once your loan is repaid -- When you buy a car, you'll eventually pay off the loan and own the car free and clear, at which point you'll no longer have a monthly car payment. When you lease, you'll always have a car payment.
- No mileage restrictions -- If you own your car, you can drive it as much as you'd like without having to worry about paying a penalty. On the other hand, if you lease, you're generally limited to 10,000, 12,000, or 15,000 miles per year before you'll start accumulating penalties.
- No charges for excessive wear -- When you lease, you'll generally be held responsible for anything that could be considered beyond "normal wear and tear." If you get a dent in a car you own, for example, you can choose to fix it or simply live with the dent and save the money.
- Customization -- A vehicle you own can be modified or customized as you see fit. Leased vehicles need to be returned in their original state, so any modifications will need to be removed, which is often impossible or very expensive.
Benefits of leasing a car
On the other hand, leasing has its advantages as well:
- A new car every two-to-four years -- Simply put, if you enjoy having a new car, leasing could be the way to go.
- Little or no maintenance worries -- For the most part, leased cars are under factory warranties throughout the term of the lease agreement. In my case, this is the primary motivating factor for leasing -- I don't like uncertainty, especially when it comes to potentially costly repairs. Leasing allows me to avoid this worry.
- Cheaper monthly payments -- While it depends on the particular make and model, as well as factors such as your down payment, you can generally lease a car for less money per month than it would cost you to buy it. In full disclosure, I lease my car, and the difference between my lease payments and what the payment would have been on a 60-month car loan was about $150 per month. When you lease, you're only paying for the vehicle's expected depreciation and associated charges, not for the residual value of the vehicle.
Here's a quick calculator that can help you compare the financial implications of leasing versus buying a particular car you're considering:
Buy vs. lease: Which is the best choice for you?
As I mentioned, from the perspective of getting the lowest monthly payment, leasing is usually the more favorable option. However, this doesn't take your personal situation and preferences into consideration. For instance, if you eventually want your car payment to end or prefer to have an asset to eventually sell or trade in, buying makes more sense.
The bottom line is when deciding whether to lease or buy your next car, make sure to consider all of the pros and cons and compare the financial implications.
The Motley Fool has a disclosure policy.