Just about everyone in the United States needs a car to get around. The decision to lease or buy a car though, is less simple. The difference between leasing and buying can significantly impact your finances and financial outlook.
Considering financing options, like car loans with a monthly payment, is a critical part of this decision-making process, as they directly affect your monthly payments and overall financial commitments.
Whether you lease a car or buy a car outright, each option has its own pros and cons, so you’ll want to really think about your lifestyle and budget when deciding.
Jump in to the details, and hopefully you’ll feel more informed about whether you want to buy or lease a car at the end.
Understanding the Basics
Understanding the concept of a car lease is the first step. Think of a car lease like a rental apartment — you’re essentially paying for the vehicle’s drop in value during the lease term without having any ownership. Keep that distinction in mind when you decide whether to lease or buy a car.
Pros and Cons of Buying a Car
Buying is a little more straightforward, but it’s not quite as simple as buying something from the store.
Not everyone can pay cash and buy a car outright, so they get a car loan that they make a monthly payment on.
Buying a car does have distinct advantages:
- Ownership: The vehicle becomes yours once you’ve paid off the loan, allowing you the freedom to modify or sell it at any time.
- Equity Building: As you make payments, you build equity in the car, which can be beneficial for future trade-ins or resale.
- Unlimited Mileage: You can drive as much as you want without facing mileage restrictions or fees.
However, there are downsides:
- Higher Monthly Payment: Loan payments might be higher than monthly lease payments, since you’re paying off the entire purchase price of the car.
- Depreciation: Cars lose value over time, and as an owner, you bear the full brunt of this depreciation.
- Maintenance Costs: As the vehicle gets older, you’re responsible for repair and maintenance expenses.
Whether you’re car financing through dealerships, a bank, or a credit union – improving your credit can save you thousands over the life of your auto loan.
With a lower credit score, you might have to pay a higher monthly payment.
Here’s an example: Terry’s credit subprime (a score of 501-600), and is trying to finance a new vehicle that costs $37,000. The cost to finance it would end up being around 12.28% of the residual value. However, by improving his credit just a bit, (to a score between 601-660), his interest rate would drop to about 9.6%.
Three percent may not sound like much, but over the long haul this equals more than $2,000 in savings, just by having better credit.
A Credit Account from Kikoff is a great place to start your credit journey. It sets you up to make on-time payments each month, keep your credit utilization low, and build good credit history.
Pros and Cons of Leasing a Car
Leasing, on the other hand, offers its own set of benefits:
- Lower Monthly Payments: Lease payments are often lower compared to loan payments, but that’s because you’re only paying for the vehicle’s depreciation during the lease. The leasing company plays a crucial role in determining these payments based on how much they estimate the car will be worth at the end of the car lease.
- Driving Newer Cars: Leasing allows you to drive a new car with the latest features every few years.
- Warranty Coverage: Most leased vehicles are under warranty for the duration of the lease, minimizing the repair costs you have to pay yourself.
Of course, leasing has its drawbacks:
- No Ownership: At the end of the lease, you don’t own the car. It’s essential to understand the lease agreement, including all terms and conditions.
- Mileage Restrictions: Most leases come with mileage limits, meaning you can only drive a certain number of miles before getting hit with fees.
- Long-Term Cost: Leasing can be more expensive in the long run if you continually lease new cars without ever owning one outright.
- End of Lease Fees: Be prepared for additional costs at the end of your lease. Lease customers should be cautious of end-of-lease fees and negotiate the terms of upfront costs and these fees where possible, ensuring they are covered by the right auto insurance, including gap insurance for leased cars.
How far do you drive?
As we mentioned above, there is a mileage limit included in the average car lease. For example, a standard car lease contract might have a mileage limit of 12,000 miles a year.
If you drive more than that, you will have to pay for each additional mile, on top of your lease payments— typically in the range of 10 to 25 cents per extra mile — at the end of the lease term.
Again, make sure you read up on all the terms and conditions in your car lease agreement.
Do you use a vehicle for your business?
If you use a leased car or truck for business, you may be able to write off your monthly payments on that leased vehicle as a tax deduction.
Of course, you need to check in with a tax professional to see if that applies to you.
Negotiating Lease Terms
If leasing seems like the right fit, remember that lease terms are negotiable. Here are some things you can negotiate:
- Vehicle Cost: Negotiate the price of the vehicle.
- Residual Value: The amount you’ll pay if you decide to buy the car at the end of the lease.
- Down Payment: A large down payment can potentially lower your monthly payment and affect the lease terms.
- Mileage Limit: Negotiate a mileage limit that suits your driving needs.
Calculating Monthly Payments
To estimate your monthly lease payment, follow these steps:
- Negotiate the vehicle cost (minus any trade-in, down payment, or rebate).
- Choose the lease term (typically 2-4 years).
- Determine the residual value (what the car will be worth at the end of the vehicle lease).
- Calculate the depreciation amount and monthly rent charge.
- Divide the total by the number of months in the lease term.
Watch Out for Dealers Who Advertise “Lease Here, Pay Here” Deals
Whenever you hear “Lease Here, Pay Here” be cautious. These dealerships often lease older used vehicles to people with low credit or poor credit.
These leases may come with higher rental charges and less flexibility, which basically means renting a vehicle with less favorable terms for you.
Additionally, ending your lease early can lead to termination fees and other penalties, which can add up.
Final Thoughts
Before you lease or buy a car, take a good look at your finances, how you drive, and what your long-term plans are. Each option has its upsides and downsides, so it’s important to consider both carefully.
At the end of the day, the best choice is the one that fits your lifestyle and gives you the most financial security and flexibility in the long haul.Understanding the ins and outs of leasing and buying will help you make a smart decision when it’s time to pick out your next car.
Building credit helps open up more favorable options for you in the long run. Kikoff offers several ways to quickly build your credit.
