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Leasing vs Buying a Car

The decision of leasing vs buying is a very important one. The fact that you are even asking this questions means you are aware there might be a financial implication. Almost always, the best financial decision is to buy the car, we will explore both. 

1. Leasing

  • When you Lease a car you are essentially renting the car for a period of time, usually 3-4 years

  • You do NOT own the car

  • The car can't be modified or else you will have to pay a penalty at the end of the lease

  • You have a choice of a "Lease buyout" when the lease ends (buying the car) for a specified amount of money spelled out in the contract, it is usually called the residual

  • Monthly payments are usually lower when compared to Buying a car, essentially you are paying for the depreciation of the car (the loss in value of the car in those 3 years)

  • The number of miles you choose may vary from 10,000 to 15,000. the exact number can be negotiated, however if you surpass that number, every mile you exceed will be charged and the exact price varies. Calculate closely how much you commute and see if it makes sense

  • There might be a charge for excess wear and tear which will have to be paid when the car is returned

  • Usually negotiation is limited

 

For some individuals a lease might work. For example, business owners might write off the lease as a business expense. Some individuals feel safer with the reliability of a new car every 3-4 years. Some might just have an expensive taste but not the money to afford it. If you are planning to work in the area for 2-3 years and then move afterwards, you might want to lease. 

 

2. Buying 

  • More expensive to begin with but at the end you own the car.

  • Planning to stay with the car for 5 years or more

  • Repairs and maintenance are part of owning a car and will need to be factored into the equation

  • No mileage limitation

  • Ability to modify the car as you please

  • After the car is paid off, no monthly payments! The longer the car runs, the more cost effective it becomes

At the end the best financial move will be to buy the car.  

Two exceptions:

  • Business owner which is able to write off the car as a business expense

  • Temporary relocation

Looking at certified pre-owned vehicles is the smartest and financially wise decision. They are the cars usually coming off a 3 year lease, have limited number of miles, and inspected by a certified mechanic, and have a warranty. The price often can be negotiated. 

The majority of individuals leasing a car become fixated on the monthly payments. Since the monthly payments are lower than buying, to the untrained eye, this seems more attractive. But in the long run, leasing ends up costing more since you have to come up with the downpayment for another lease.

 

Till next time,

JL

Disclaimer - This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, should not be treated as such.