One of the most important decisions in life is purchasing a new car, but do you buy or lease? There are advantages and disadvantages to both buying and leasing, and you will need to do some research to decide what is best suited for your needs. Many people continually lease new vehicles back-to-back, and this method has its benefits, but it’s not for everyone. Others purchase a new car with the intention to keep it long after it has been paid off.
Regardless if you choose buying or leasing, you will need to know the differences between the two and decide which one is right for you. Most major dealerships offer lease programs and can help you understand their intricacies. They can also help you obtain financing to buy the same new car, truck, or SUV. Let’s delve deeper into how buying and leasing a new vehicle works.
What Is Leasing?
Leasing a vehicle is similar to renting, just for a set amount of time determined by the lease agreement. When leasing, you aren’t paying the vehicle’s full amount; you are only paying fees, interest, and the car’s estimated depreciation. The length of a lease is usually two to three years, but longer leases can be arranged.
When leasing, you will need to know some essential financial terms that are key to the leasing process. Capitalized cost, sometimes referred to as cap cost, is the fixed price for the vehicle you want to get. Most often, the capitalized cost is already set by an automotive-sponsored lease deal. Other types of leases may allow for the capitalized cost to be negotiated, and if this is the case, you will want to try to get this price as low as possible. If there are special lease deals from the automaker, they will be called cap cost reductions.
Residual value is another term you will hear when setting up a lease. This value is an expert’s opinion and represents what the car will be worth at the end of the lease term. You will want the residual value to be the highest percentage possible of the car’s capitalized cost. If it is lower, you will be required to pay more of the vehicle’s capitalized cost.
The last term you will want to be familiar with is the money factor. The money factor is the amount of interest included in your monthly payments. To convert this number to an interest rate, you will need to multiply the money factor by 2,400. You can do this manually or find an online conversion tool to help with the calculations.
Now that you know these terms, you can figure out what you will be paying for the lease. To get the total cost, subtract the residual value from the capitalized cost. Once you have this number, you add the money factor, fees, lease origination costs, and registration fees to determine the total cost.
Pros and Cons of Leasing
Some advantages come with leasing a new car. These advantages can be the difference in your decision to buy or lease. Here are some of the pros to leasing a vehicle:
- Saving money on sales tax.
- Having the latest automotive technology.
- Lower monthly payments.
- Potential lower down payments.
- Trading in a leased car is simple.
- You will always have a warranty.
There are disadvantages to consider as well when exploring leasing as an option. You will have to make an educated decision when choosing between buying or leasing, and knowing the cons will help you determine the best course of action. Here are some of the cons of leasing a car:
- You will have a mileage limit per year.
- You won’t own the vehicle.
- You are required to have gap insurance.
- You have to return the car to the dealership in pristine condition.
- Bad credit can hinder getting a lease.
- You will always have a vehicle payment.
- Customizing your vehicle is out of the question.
- Restrictions are placed on how the car can be used.
- You won’t receive cash when it comes time to trade in.
- The leasing process can be challenging to understand.
- The dealership is the required place for vehicle service.
- A lease is a binding contract.
- You can be surprised by lease-end costs.
- Leases are limited.
What Is Buying?
Buying is considered the traditional way of obtaining a new car. This method remains the most popular way to acquire a new vehicle. When purchasing, you can either pay the full amount or take out a loan.
When you have decided on a vehicle, you will want to negotiate the total price as low as possible. Factors such as your income, down payment, and credit score make auto loans unique to the individual. Unlike a lease, you will own the vehicle free and clear once you have paid all scheduled payments.
Pros and Cons of Buying
Buying a new car also has its own pros and cons compared to leasing. Here are some pros to buying:
- The financing process is simpler.
- You own the vehicle.
- You can get cash towards a new car when trading in.
- You can customize it as you see fit.
- You can have a third-party mechanic service it, or you can do it yourself.
- There are no yearly mileage limits.
- Once the loan is paid, there are no more payments.
- You can refinance to save money.
- You can trade or sell when you are ready.
Here are some of the cons associated with buying:
- The warranty will run out.
- In the short term, buying is more expensive.
- The sales tax is higher.
- The vehicle’s future value is undetermined.
- Larger down payments may be required.
- You will be required to pay interest on the total cost.
Deciding between buying and purchasing will take some research and ultimately comes down to your preferences, finances, and credit score. If you are looking for more short-term savings with lower payments, leasing is better. If you are looking to own a vehicle with no limits and have the ability to customize your ride, buying will be the best decision. Taking the time to look into the ins and outs of buying or leasing will help you better understand which one works for your situation.
Image via Flickr by House Buy Fast