Just last month, Katy, a Finance Opinion writer, had to head to the dealership to trade in her lease – although she went into the process feeling a bit uncertain. With newer models being hard to come by (thanks to production shortages in the after-effects of the COVID-19 pandemic), she wondered if it was time to switch from leasing a new car every few years to purchasing a vehicle and investing in it for the long-haul.
If you’re in the market for a new car, you may be wondering the same thing: does it make more sense to lease or buy? While both leasing and financing a car have their pros and cons depending on personal preference and finance goals, either option isn’t always the best solution for everyone.
To determine whether leasing or buying a new car is right for you, read on as Katy and the Finance Opinion team outline the benefits and setbacks of each, so you can head to the dealership feeling confident and informed in your decision making process.
What’s the Difference Between Leasing and Financing a Car?
When it comes to leasing vs financing, the biggest differentiator comes down to actual ownership of the vehicle. When leasing, you don’t own the car; you pay to use it for a fixed period of time, and, once the lease term ends, you need to either return the vehicle or buy it from the dealership.
When you finance a car, you own it outright, and make payments toward a loan borrowed to fully purchase ownership of it. You can keep the car as long as you’d like, and add any customizations or modifications (like paint color, a remote starter, and so on).
When it Makes Sense to Lease
If you want to keep monthly payments as low as possible, you may be better off leasing a car. That’s because you’re not paying back any principal on a loan. Instead, you’re just borrowing and repaying the difference between the car’s value when new, and the car’s residual—its expected value when the lease ends—plus finance charges.
Another benefit to leasing is you don’t have to deal with the major maintenance (and expenses!) that comes along with a car as it ages. Think: new brakes, tires, and replacement parts. That’s because leased vehicles are often newer, and if they do need an updated part or maintenance, it’s often covered under your lease warranty.
Additionally, if you’re someone who enjoys the latest bells and whistles, leasing a new car could be a great option for you, since the terms are usually two to four years, meaning you trade in the lease for something new every few years.
The bottom line: If you enjoy new cars, lower monthly payments, and don’t love the idea of paying for ongoing maintenance as a vehicle ages, leasing a vehicle could be a good fit for you. But read on to know what to keep in mind…
When Financing May be a Better Fit
First and foremost, it’s important to remember that leased vehicles come with a mileage cap, meaning that if you exceed the yearly mileage restrictions on your lease, you can be hit with a pretty hefty fine for every mile over that cap.
As an example, if your lease comes with a 12k mile-per-year limit, and you’ve hit 40k miles at the end of your lease term, you can expect to pay anywhere from 15 to 20 cents per mile in overage fees. That equates to over $600 in fees when it comes time to turn in your vehicle!
Another thing to consider is if you drive a lot, you’re going to see normal wear and tear on your vehicle. If you don’t keep the vehicle in good condition, you’ll have to pay excess wear-and-tear charges when you turn it in. So, if you have dogs or kids that are frequently in the car, or you’re a magnet for parking lot dents and dings, be prepared to pay extra.
The bottom line: If you drive a lot (like Katy) and know you won’t be able to keep your vehicle in the most pristine condition (no judgment from us!), or won’t be able stay under your mileage limit, financing a vehicle may be the better option for you to avoid unnecessary fees.
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.
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