Budgeting
Aug 25
,
6
min read

Should You Lease or Buy a Car?

If you're in the market for a new car, you may be wondering whether you should lease or buy.
Adrianna Adams, CFP®

If you're in the market for a new car, you may be wondering whether you should lease or buy. Both options have their advantages and disadvantages, and the decision ultimately depends on your individual needs and financial situation. In this article, we'll explore the pros and cons of leasing and buying a car, and provide some financial examples to help you make an informed decision.

Leasing a Car

Leasing a car involves paying a monthly fee to use a car for a specified period, typically two to three years. At the end of the lease term, you return the car to the dealer. Leasing a car can have several advantages, in comparison to purchasing a car, including:

  1. Lower Monthly Payments: Because you're only paying for the portion of the car's value that you use, monthly lease payments are typically lower than loan payments for buying a car.
  2. Less Money Down: Lease agreements often require less money down than buying a car, which can be helpful if you don't have a lot of cash on hand.
  3. Less Maintenance: Because leased cars are typically new and covered by warranty, you'll likely have fewer maintenance costs during the lease term.
  4. Easy Upgrades: At the end of the lease term, you can simply return the car and upgrade to a newer model.

However, leasing a car also has some drawbacks to consider, including:

  1. Mileage Limits: Lease agreements typically come with mileage limits, and you'll be charged for exceeding these limits.
  2. No Equity: Unlike buying a car, you won't own the vehicle at the end of the lease term, and you won't have any equity in the car.
  3. Fees and Penalties: Lease agreements often come with fees and penalties for things like excessive wear and tear or terminating the lease early.

Let's take a look at an example to illustrate the financial implications of leasing a car. Suppose you're interested in a new car that costs $30,000. You decide to lease the car for three years, and the lease agreement requires $2,000 down and monthly payments of $300. At the end of the lease term, you return the car, and there are no additional charges or penalties. Here's how the total cost of leasing the car breaks down:

  • Down Payment: $2,000
  • Monthly Payments (36 months x $300): $10,800
  • Total Cost of Lease: $12,800 (over a three year period)

Buying a Car

Buying a car involves either saving up enough cash for the purchase in advance, or taking out a loan to pay for the full cost of the vehicle, and making monthly payments over a specified period. Once the loan is paid off, you own the car outright. Buying a car has several advantages, including:

  1. Ownership: When you buy a car, you own the vehicle outright, and you can do with it as you please.
  2. No Mileage Limits: Unlike lease agreements, there are no mileage limits when you own a car.
  3. Equity: Over time, you'll build equity in the car, which you can use as a down payment for your next vehicle.
  4. Lower Long-Term Costs: While monthly loan payments may be higher than lease payments, buying a car can be less expensive in the long run because you won't have to pay for a new car every few years.

However, buying a car also has some drawbacks to consider, including:

  1. Higher Monthly Payments: Because you're paying for the full cost of the car, monthly loan payments are typically higher than lease payments.
  2. More Money Down: Buying a car often requires a larger down payment than leasing, which can be a barrier if you don't have a lot of cash on hand.
  3. Higher Maintenance Costs: As the car ages, you'll likely have more maintenance costs to contend with, which can be expensive.
  4. Depreciation: Cars depreciate quickly, so when you decide to sell or trade-in the car later on, the resale value may be much lower than what you initially paid. 

Let's take a look at an example to illustrate the financial implications of buying a car. Suppose you're interested in a new car that costs $30,000. You decide to finance the car with a five-year loan at an interest rate of 4%, and you make a $3,000 down payment. Here's how the total cost of buying the car breaks down:

  • Down Payment: $3,000
  • Loan Amount: $27,000
  • Monthly Payments (60 months x $498): $29,880
  • Total Cost of Loan: $32,880 (over a five year period)

Leasing vs. Buying: Which is Right for You?

The decision to lease or buy a car ultimately depends on your individual needs and financial situation. You may want to consider leasing if you do not have a long commute, or if you don’t plan on putting many miles on the car each year. Typically, the more mileage you put on a leased vehicle, the more expensive your payment and fees will be. If you prefer driving a new car every few years with the latest features, leasing may be a better option. 

Although your monthly payments will be less expensive, the vehicle will have no resale value after the lease term is up. Monthly lease payments go on forever, whereas once a purchased car is paid off, you will enjoy debt-free ownership. For this reason, buying a car may be a more suitable long-term option. In addition, consider buying if you drive frequently and expect to put more mileage on your vehicle. This way, you will not be surprised by unexpected fees if you exceed your mileage limit.

How Domain Money Can Help

Ultimately, the decision to lease or buy a car is a personal one. It's essential to weigh the pros and cons of each option and consider your individual needs and financial situation. At Domain Money, your dedicated financial advisor can help you make an informed decision. Additionally, our budgeting tools can help you determine how much you can afford to spend on a car, so that you can make the big decision with confidence. 

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