When Kenny B. began shopping for a car, he was pretty sure he would be buying something. However, after looking at the benefits of leasing, Kenny B. changed his mind.
“I am not sure where I’ll be in 3 or 4 years. If things go according to plan, I’ll be married. Who knows, I might even have a family,” says Kenny, 28, of Las Vegas. “I was intimidated by the idea of buying a car for the long term – having to make that decision now.”
In contrast, leasing a car is really just a long-term rental agreement. You will make monthly payments for 1 to 5 years. This lets you drive the new car with the option of either returning it or purchasing it when the lease term is over.
Which option is right for you will depend on a number of factors. In the long run, it is usually cheaper to purchase a car, but you will have less flexibility, and typically your monthly payments will be higher. Answer these five questions to help you decide whether it makes more sense to buy or lease your next vehicle.
#1 How long are you planning to keep the vehicle?
With a lease, you do not own the vehicle, but instead you are paying to use it. Leasing lets you regularly change what you drive. Leasing is really about a lifestyle choice. Do you want to drive a new car every few years? Leasing lets you do just that.
If you like to change what you drive often or you are anticipating that your needs will change in the near future, then you should consider leasing. If your plan is to keep your vehicle over a longer period of time, then owning might be a better option. A car is an asset that depreciates, which means that is loses value the minute you drive it off the lot. So, no matter what vehicle you choose, remember that it’s going to be worth less when you will go to sell it in the future.
#2 What does your monthly cashflow look like?
When you lease a new car, your monthly payments are usually lower than if you buy a new car. That’s because you pay only for the estimated depreciation of the vehicle during the lease plus a rental charge, fees, and taxes.
Typically, when you take out a loan to buy a new car, it results in higher monthly payments. So, if you want to limit the amount of cash you have spend each month, you may want to consider a lease. However, if you are planning to keep the car for at least 5 years, and you are able to make higher payments, once the loan is paid off, you own the vehicle outright. Then, you can enjoy a relatively new vehicle without having to make monthly payments. As an owner, eventually, when you decide to sell it, you will get whatever it’s worth if you trade it in or sell it directly.
#3 How much cash do you have for the down payment?
Usually, getting a new leased car requires a much smaller down payment than when buying a car. For example, Kenny B. traded in his 10-year-old Volkswagen Gulf and drove away in a new, leased Nissan Frontier truck with no down payment and no first month’s payment. The value of Gulf covered these costs. Of course, the disadvantage is that at the end of the day you do not have an asset to trade in or sell when you decide you are ready for another vehicle.
#4 How much driving do you do?
What many people are unaware of is that almost all leases limit the number of miles you can drive per year without paying a huge fee for additional mileage. Typically it ranges from 10,000 – 15,000 miles annually. You can certainly put on more miles, but you will be charged for it. The cost for each additional mile does vary. Occasionally, you can negotiate a lower cost per mile when you get your lease, but that doesn’t happen often. Sometimes, at the end of your lease, if you lease a new vehicle again, the dealer will forgo these additional mileage charges. The bottom line is if you drive a lot, you will want to consider whether a lease will work for you.
#5 Do you drive for your business?
If you own a business where you will use your vehicle, the IRS says that there are times when you are allowed to take a tax deduction for part of your lease payment, so talk to your tax advisor and see how this applies to you.
If you are in the market for a vehicle, consider these 5 points to help you decide whether to lease or buy.