The inflated cost of new automobiles should prompt motorists to consider whether it is wiser to lease or buy a car.
While selling a car can provide you with some extra cash, hiring or purchasing a vehicle can put pressure on one’s finances and should be considered carefully. According to Kelley Blue Book, non-luxury new car prices rose to an average of $43,338 in May 2022, up by $709 from April. In addition, new car buyers have paid more than the Manufacturer’s Suggested Retail Price (MSRP) in every month of 2022 so far. Consumers were paying $400 less than MSRP only one year ago.
The great news is that used car prices have begun to trend downward. However, you may be on the fence about whether to finance a new or used car or lease a vehicle. This article explores the pros and cons of leasing vs. buying a car so you can decide the best option for you.
If you want to learn more about investing and dividends, then I suggest taking a course. The Simply Investing Course* is a good value and fairly comprehensive. It consists of 10 modules and 27 lessons. You get lifetime access and 1-month access to the Simply Investing Report & Analysis Platform*.
The Simply Investing Report & Analysis Platform* analyzes 6,000+ stocks and has over 120 metrics and financial data. It include portfolios, watch lists, dividend income, e-mail alerts, etc. The best part is the list of top ranked stocks based on the 12 Rules of Simply Investing.
Leasing or buying a car is not a decision to take lightly. Whichever route you choose can affect your finances for years to come. Therefore, you want to be well informed on the pros and cons of leasing and buying to make the best choice for your situation and budget.
The advantages of leasing a car are pretty straightforward. Here are the two most significant benefits of leasing instead of buying a car.
Many people opt to lease a vehicle because a lease payment is typically lower than the monthly payment to finance the same car. Therefore, leasing can enable you to drive a nicer car than you would otherwise be able to afford to buy.
As the lessee, you are renting a new car from the dealership. Typically you lease the vehicle for a term of 24 or 36 months. Therefore, driving a leased vehicle allows you to drive a new, reliable car with the latest safety features. Your lease may include scheduled maintenance for the car, keeping your ride dependable and in top condition on the road.
There are clear downsides to leasing as well. Some of these factors may cause your lease costs to skyrocket. Therefore, it’s necessary to consider your monthly household budget to determine your best option, whether you make $40,000 a year or $100,000 a year.
Unlike those who buy a car outright, those who lease a car will always have a car payment to make. High car payments can wreak havoc on a household budget and make it difficult to get ahead with your finances. This could compel you to increase your income by taking on a side hustle or increasing the number of hours worked in a year.
When your lease ends, you have three choices: trade your vehicle for another lease, walk away after returning the car or purchase the vehicle you’ve been leasing. The buyout price (also known as the residual value) is already specified in the lease terms when you first take possession of the car. The buyout price may be higher than the price of a new car of the same model, which is not a good deal. However, sometimes you can negotiate the buyout price if your lease contract includes that clause.
A car lease has mileage restrictions. If you must drive a lot, leasing may not be the best option. Your lease agreement will specify the number of miles you can drive the car annually. Annual mileage on a lease is typically between 12,000 and 15,000 miles per year. You will have to pay the penalty for exceeding the mileage specification on your lease. You usually pay around 15 to 20 cents per mile over the limit.
There are many hidden fees when leasing a new vehicle. First, you’ll pay an acquisition fee at the beginning of your lease. This fee is usually around $500. A disposition fee is charged at the end of the lease and covers the disposal of the car (clean up and sale of the vehicle) if you don’t purchase the car. Disposition fees are $300 to $500.
The lessor will also charge for excessive wear-and-tear of the leased vehicle if you don’t return the car with “fair wear and tear.” So be prepared to pay for any scratch or imperfection on the exterior. In addition, the leasing company will charge you if there are any stains on the car’s interior.
You must pay a lease termination fee if you need to return the car early. There are many reasons why you may need to return the vehicle early, such as job loss, work relocation, or becoming ill. The termination fee is often the entire remaining amount on the lease. However, if you need to terminate your lease, you may be able to find someone to take over your lease payments to avoid paying the penalty. Check on lease take-over websites like LeaseTrader to help you find someone to take over your lease.
Buying a car has some significant pros and cons. Weighing all your options will allow you to decide whether you should lease or purchase.
An obvious benefit of buying a car is that you own it. Since you don’t have to return the vehicle at the end of a specified period of time, you can keep it as long as you would like. You don’t need to worry about paying acquisition and disposition fees or extra money for minor scratches or dings.
Driving a car long-term is advantageous because you can save money by paying off your car and keeping it as long as possible. In addition, not having a car payment for several years is an excellent way to free up cash to work toward your financial goals.
Owning a car allows you to do whatever you want with it if and when you tire of it. If you aren’t happy with your car after driving it for a year or two, you can sell it or trade it in for a different model without incurring high fees like you would for lease termination.
There are no limits to how far you can drive. Buying a vehicle may be the better choice if you tend to drive further than the average person. When you lease a car, there are fees associated with exceeding the specified miles in your lease.
If you are a car enthusiast and enjoy modifying your vehicles, buying a car is the way to go. Whether you want a custom paint job or tinted windows, you are free to add your personality to your vehicle (within limits of the law) when you purchase your ride. However, when leased, a car must look the same when returned to the dealer.
Owning a vehicle isn’t the best choice for everyone. Often, the availability of funds or lack thereof for a down payment will determine whether you should lease or buy. However, you should be aware of the other downsides to buying a car.
The monthly payments are typically higher when you take out a car loan instead of signing a lease agreement. Even though paying off your car and keeping it for the long term can save you money, higher car payments may make buying a vehicle unachievable for people that don’t have extra room in their budgets.
A new car depreciates around 10% of its value when you drive it home for the first time. By the end of the first year, the car will have depreciated by around 20%. In addition, the vehicle will continue to depreciate at about 10% of the car value each year.
Another thing to remember is that mileage and wear-and-tear affect your vehicle’s resale and trade-in value. So if you drive your car more than the average person, don’t expect to get the highest Kelley Blue Book value when you unload it.
Buying a car and keeping it for the long term has its money-saving perks. However, let’s face it, cars need to be serviced and repaired, and you’ll need to replace parts as they wear out. These sometimes unexpected costs can wreak havoc on a household budget.
At the end of a lease, you drive the car to the lot, fill out some paperwork, and walk away. However, when you own a car, you have to deal with selling the car privately or trading in the vehicle. You must enter negotiations and haggle to get what you feel the car is worth. Getting rid of your vehicle can be a very stressful and frustrating part of car ownership.
Whether to lease or buy a car is a critical decision and is not a decision to take lightly. After considering the pros and cons of leasing vs. buying a car, hopefully, the right choice for you is clear. It’s crucial to weigh the effects of your decision on your budget and bank account to ensure congruence with your lifestyle and long-term financial success.
This article by Lisa of Adapt Your Dollars originally appeared on Wealth of Geeks, and was republished with permission.
You can also read The 5 Best States To Retire (And 5 Worst).
- How to Refinance a Car: 7 Easy Steps to Save You Money
- How to Prepare for the Average Cost for Car Repairs
Here are my recommendations:
If you are unsure on how to invest in dividend stocks or are just getting started with dividend investing. Take a look at my Review of the Simply Investing Report and Course. I also provide a Review of the Simply Investing Course. Note that I am an affiliate of Simply Investing.
If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend Newsletter. Note that I am an affiliate of Sure Dividend.
If you want a leading investment research and portfolio management platform with all the fundamental metrics, screens, and analysis tools that you need. Read my Review of Stock Rover. Note that I am an affiliate of Stock Rover.
If you would like notifications as to when my new articles are published, please sign up for my free weekly e-mail. You will receive a free spreadsheet of the Dividend Kings! You will also join thousands of other readers each month!
*This post contains affiliate links meaning that I earn a commission for any purchases that you make at the Affiliates website through these links. This will not incur additional costs for you. Please read my disclosure for more information.