There are some debates that seemingly go on forever. One of those universal debates is whether or not it is best to buy or lease a new car. As is the case with any other choice that you make in life, there are pros and cons to both sides of this debate. The most important thing to keep in mind is the bottom line; how your next car purchase will affect your finances! You must take into consideration that the decision to purchase a vehicle will be more financially beneficial for some people, while leasing will be the better option for others. In other words, there is no cookie-cutter answer that puts an end to this debate once and for all. Instead it is best to be informed about the pros and cons of buying/leasing and make the best decision for your current situation.
When you lease a car, you are essentially borrowing the entire value of the car (minus down payment or trade in). Let’s say that you lease a $30,000 car. You are instantly tying up all of the $30,000 that the financing company gave to the dealership, just like you would be if you were purchasing the vehicle outright. You will also pay a monthly car payment with interest, less any money that you pay back along the way. It all boils down to the amount that you wind up paying back to determine whether a lease or traditional purchase is best for you.
If you took out a loan to purchase a car for say $36,000, your monthly payments are based on the total cost of the vehicle. A 36 month car loan for that vehicle would put the principal portion of the loan at an average of about $1,000 a month. With a lease, however, you would pay back only the depreciation cost sustained while you were using it.
A $36,000 vehicle, for example, might wind up depreciating about $18,000 over 36 months. The principal portion of the lease payment every month would be based on about half as much as the loan. At the end of the lease, you return the vehicle, unless you were able to cough up the remaining $18k of the residual value of the vehicle to purchase it.
In both of these cases, the net principal amount that you pay back comes in at $18,000. However, if you lease, you will pay higher finance rates to borrow the money. You pay more on a lease because you are paying back the cost of the leased vehicle at a slower rate – the whole $500 a month compared to the $1000 per month with a traditional loan. Your unpaid balance is higher every month, which means more costly finances charges each month.
Leasing a car does allow you to pick up a new vehicle every few years, while most people who purchase their vehicles tend to hold onto the older models for longer periods of time. And don’t forget that the up-front costs of leasing can be pretty expensive. You will likely have to provide a down payment, security deposit, the first month’s payment and other costs.
Before you make your final decision, you must balance the pros and cons of each scenario and then make your final decision. If you like the idea of holding onto your vehicle for as long as possible, a traditional loan might be your best bet. But if you like getting behind the wheel of a brand new ride every couple of years, and don’t mind jumping through a few minor hoops, then a lease is probably your best bet.