Buying a new set of wheels can have a sizeable impact on your finances, so there’s quite a lot of things to consider as a consumer. Before making big moves, it pays to weigh your options by looking into the pros and cons of buying or leasing a car— which is usually a tough call. These advantages and disadvantages largely depend on your financial situation and personal preference.
Deciding whether to buy a new vehicle instead of purchasing it comes down to priorities. Buying or leasing is purely a matter of cents and dollars for some, while it’s a matter of forming an emotional bond to the car for others. Understanding some key distinctions is necessary before finally deciding which road to go down.
What does it mean to lease a car?
Leasing a car or any vehicle gives you the consent to rent it from the dealer for a certain amount of time, probably around 3 to 4 years. After the leasing period ends, the lessee can either return the vehicle to the dealer or purchase it at a pre-established amount defined in the lease contract.
With a lease, you are just basically paying to drive the car and not own it.
As you leave with the car, a certain amount of money that would be allotted for taxes and fees should be paid. Moreover, to cover the cost of the car’s depreciation, there’s a monthly payment to be paid during the lease period. The leased car must be in good condition upon return to avoid penalty.
Pros of Leasing a Car
Lower monthly payments
If you are one of the people who are concerned about monthly costs, leasing a vehicle might be less burden than buying one. The monthly payment for leasing is considerably less than it would for a car loan.
Leasing may be a good option if you only have a small down payment saved up. It only takes zero to several thousand dollars upfront to lease. Numerous new car deals are advertised lease offers that guarantee low monthly payments. Some ask for high down payments, though.
Similar to outright purchases, the more money you give out on the lease down payment, the lower the monthly payment would be.
Drive a new car every few years
Leasing a car is a way to go to drive new-model vehicles, so if you’re always up for trends and new models, leasing may be the best choice you can make. After your leasing contract ends, you can return the late-model car to go and get a new one.
Worry-free maintenance
The warranty included in the car offers typically lasts for at least three years. Hence, most repairs should be covered when you take out a three-year lease. With leasing arrangements, you can greatly eliminate the risks of significant unexpected expenses.
Cons of Leasing a Car
Restrictions in annual mileage
Most car leasing offers yearly mileage restrictions ranging from 10,000 to 15,000 miles. If you go beyond this mileage limitation, there would be a premium of 30 cents for every mile driven.
Expensive in the long run
If you still need to drive a car around after the lease is over, you will need to lease a new one again— requiring you to pay monthly payments over and over again. But if you’ve come to think of it, if you buy a car in the first place, you won’t need to pay monthly payments again once you pay the amount in full.
What does it mean to buy a car?
Buying a car is the most forthright way of acquiring one— either you take out a loan or pay full in cash to cover the cost. Most people who are skeptical about buying a car are those who are concerned about its price. However, there are more inexpensive alternatives in buying a car, such as pre-owned cars and used vehicles.
Brand new cars that are bought on loan may have monthly payments that are higher than the monthly payments when leasing a vehicle, but once the amount has been paid in full, the vehicle will be officially yours, unlike when leasing, where you have to take it back to the creditor.
Pros of Buying a Car
No mileage limits
Buying a car means being worry-free of mileage limits present in leasing. No matter how many miles you drive, you won’t have to worry about paying extra fees for going beyond limits. If you think you’re likely to cover a lot of miles, it would be more feasible to buy a car than lease one. Aside from maintenance and fuel, there’s no premium asked for driving long distances.
Ability to trade or sell the vehicle
Paying outright with cash will give you the ownership of the car instantly, allowing you to do whatever you please concerning it. Since you will be the sole owner of the car and there’s no need to give it back to the company, you’re free to sell or trade it to anyone interested if you need cash or desire an upgrade. Owning the car, yourself also gives you the chance to rent out or also lease your car for extra profit.
Cons of Buying a Car
More expensive in the short-term run
Compared to leasing, you will be required to pay more expensive monthly payments for your car loan. The cost of a car only comes cheaper when bought outright with cash fully.
Long-term maintenance cost
Although it feels quite good to say you have a car, owning one actually comes with a big responsibility. When things go wrong and some parts of your break, you have to spend a hefty amount of money to get it fixed.
Buy or Lease: Which one is better?
The decision to whether buy a car or lease one should come after carefully analyzing the pros and cons of buying and leasing one. It’s better not to rush in making a choice but carefully assess your driving habits and financial status. Analyze the amount of money you will need to pay upfront and the miles you need to drive to find out which one will work for you best.
How to calculate lease payments?
The “lease payments” are the payments that the lessee needs to pay for a monthly fixed rental fee for using the asset under the lease agreement. Here are the simple steps to calculate lease payments:
Monthly depreciation
To calculate the estimated depreciation, you first need to look for the residual value. The “residual” is the value determined by the leasing company or bank. At its core, it is the prediction or the estimated value of the vehicle after the leasing agreement ends. To calculate the residual value, here’s the formula: Monthly Depreciation= (Capitalized Cost- Residual Value)/ months.
Monthly Finance Charge
The formula to calculate the monthly finance charge is given as Monthly Finance Charge= (Capitalized Cost+ Residual Value) x Money Factor.
Base Monthly Payment
The base monthly payment is basically the amount before tax. To calculate the base monthly payment, add the amount of monthly depreciation to the monthly finance charge.
Monthly Lease Payment
Taxes are the last thing to be added in calculating lease payments. Lease taxation typically differs in various states. The taxes are levied on the lease payment in some states, while other states tax on the complete worth of the lease. There are also states that tax depending on the full selling price, leading to a hefty fee for tax.
The formula for calculating monthly lease payment is Monthly Lease Payment= Base Monthly Payment x (1 + Tax Rate).