Buying a new car can go one of two ways. It can either be a breeze, or a real pain in the behind. More often than not, buying a new car can become extremely stressful. Frequently, the novelty of owning a new car can wear off rather quickly but then you are still left with years of car payments. For this reason, it is extremely important to weigh out the options of whether to lease vs buy a car and to figure out which is best for you. The decision may not be easy, often we can lose sleep over it, this article will help shed some light on which financing decision would be most rational for you.
The most attractive part about buying a car, is that essentially, you will one day own the car outright once you have finished the car payments. But financing a car can quickly become a horrible decision because when you finance a new car you are paying out the full price of a car. One must consider that the second you leave the dealership your car loses value. Investing in a brand new car is comparable to putting your money into a savings account that decreases your savings. Essentially what this means is that you will never come close to selling your car for even half of its original price, factor in the interest rates, dealer fees, registration fees, and taxes and your new car investment quickly becomes a money sucking bottomless pit.
The benefits of owning the car might however out-way the financial burdens it comes with. If you are the type of person who commutes long distances on a regular basis, then buying a car is the right choice for you. You can rack up an unlimited amount of mileage without having to worry about overage fees, along with paying lower rates on insurance, and of course if anything ever broke you would not have to worry about paying fees for excessive wear and tear, as one would if they were to get a lease. A opinion is that unless you are looking to keep a car for 10+ years and need to commute long distances buying a car is almost always the bad way to go. I have been a car dealer, new and used, for over 5 years now and have been in the car business for 10, i have met many people, some who lease, some who buy, overall people end up much happier when they go with leasing a car.
Some drawbacks about buying a car, especially when financing: first thing to consider is that your monthly payment would be higher than it would if you were leasing a car, this is because you are paying out the full amount of a car, along with any extra fees and tax on the entire price of the car. Along with this, you also have to consider that most dealers will ask for a considerably high down payment on the new car, so your out-of-pocket expense when purchasing will be much higher, even if doing a long-term finance.
The presumption is that as you make payments on your car and the loan goes down, you can begin to build equity in your car. This is false advertisement, usually, even with a handsome down-payment by the end of the first year’s payments car owners find themselves up-side down on their investment. This is because, when you finance a car your monthly payments are divided between paying principal, and interest, the amounts for each fluctuate from payment to payment. It’s important to keep in mind that within the first few years of a new cars life its value will have depreciated anywhere between 25%-45%, in most cases, you are simply paying off the interest part of your loan for the first year of car payments. This means that by the time a year passes, and the cars value has depreciated significantly, you haven’t even begun paying off the principal price of the car. It’s like being hit with a double-edged sword, on one hand your car is losing value and on the other hand the payments you’ve made have only covered the interest rate. This results in very little equity left in the car.
The benefits of leasing a car can many times surpass that of buying one. For starters when you lease, your initial out-of-pocket expense is much lower, most dealers will ask for little to no down payment on a lease. Also, the customer doesn’t need to pay the entire tax of the vehicle up front, the tax is built in to the monthly car payments. Aside from the initial lower out-of-pocket expense customers will also save on maintaining the car. New cars are under warranty and many companies provide excellent services for close to no cost to the customer. Monthly payments are also lower because you are only paying off the residual cost of the car over three years, in comparison to the full cost price of a car when financing.
Lease terms can range from 24-48 months for the most part, and since you don’t own the car your monthly payments will only go towards paying the depreciation of the car, even if the residual value changes in the middle of your lease term, you have already signed a contract to pay a certain amount, so you never really lose or end up paying more than what the car is worth. By the payments going to depreciation, by leasing a car you will essentially never end up in an upside-down situation.
My personal favorite about leasing is that I can drive a new car every few years, and never feel like I have gotten tied in to a marriage.
There are downsides, however, to leasing a car. The major one, of course, is that you have the burden of keeping a close eye on your mileage ALWAYS. When you lease a new car, you will sign an agreement to keep the car under a certain mileage, most terms are either 7500 miles a year, 10,000, 12,000, 15,000…etc. The higher mileage usage the more expensive the lease, this still will be cheaper than buying, however, if you go over the mileage you will be forced to pay per mile at the end of the lease term. This can turn into a financial nightmare, my father once leased a new Mercedes-Benz E350 by the end of his lease he was 10,000 miles over the limit, not knowing that he can purchase more miles while having the car he returned it to the dealer and had to pay an extra $2500. If you drive more than 15,000 miles a year, leasing is NOT a good option for you, it will result in hefty charges. Another downside, and i really wouldn’t call it one, but some do, is that at the end of the 3 years, and many thousands of dollars later you will be left with nothing, no car, and the money gone. It is wrong to look at it from that perspective because, you had the car for three years, drove every day, made lower payments, and did not have to carry the burden of paying off something that lost all of it’s original value. By leasing a car, you don’t have to get married to the car, if you don’t like it you can get rid of it in a few years, on the other hand if you are really unsatisfied with the car before the lease term is up you will have to pay out the balance of the car and early termination fee’s, this will still end up costing less than selling a car you finance for the most part.
Finally, insurers will on average charge higher rates on leased cars, however, depending on various demographics such as, age, driving record, and where you live this higher rate may only be a few dollars.
Words of wisdom
When leasing it is especially important to consider that you will be responsible for paying for the first and most expensive years of the cars value. This is because the price of lease is based upon its residual value. So when considering which car to lease it’s important to go with makes and models that retain their value after a few years. From my experience these can be cars like, Honda pilot, Lexus RX lines, some Toyota’s and sometimes Infiniti has good residuals. I am not an employee of any of these companies and am not trying to push any of these cars, simply just speaking from experience. If you are looking to lease a car in the United States check out this great company that gives some of the best rates in the country. Reconsider buying cars that loose value quickly, in most cases you will overpay and then certainly feel like you lost money on leasing.
Truth is, there is a lot of factors that go into deciding whether to lease or to buy. The choice is really up to you, there is no right or wrong answer. It depends on what the person is looking to get out of their car and what kind of car they are looking for. It boils down to the individual, is your goal to one day pay off a car and then own it and keep it for yourself, or you drive religiously and will go over mileage, buying is for you. If you are the kind of person who wants to be driving a new hot car every few years, then leasing is your best option. Whatever the choice is, research as much as you can before you make your final decision.