Leasing: Pros & Cons
In general, lease agreements promote lower monthly payments. In addition, many car dealers will offer lease specials to help move new vehicles off their lots.
Car loans typically don't require a down payment. Drive off fees, which include your first month's payments, can be due at lease signing, but if you have excellent credit, you shouldn't have to put any additional money down.
When you buy a new car, if you decide you don't like it after a few years, you're stuck with it. With a lease, you can trade it in for something else when the lease term is up—no questions asked.
When you buy a car, you're financing the entire value up front. On a lease, you're paying for the differencebetween the car's:
Its expected value at the end of your lease term.
Also knows as the residual value.
Based on the resale history of that vehicle, your dealer will predict what the value of your car will be at the end of your lease.
You purchased a car for a current price of $30,000.
Its expected value is $16,500 at the end of your lease.
Your payments will be based on the remaining $13,500.
As part of a lease agreement, the future resale value of your vehicle is predicted and put in writing.
If the car depreciates faster than predicted, it has no effect on your lease, and could actually benefit you if you decide to purchase your car after your lease is over.
The better your credit the more responsible you appear on paper. Banks can raise the Annual Percentage Rate on a car loan to cover their risk, but on a lease there is not APR so banks don't have as much flexibility.
If you finance (buy) a car, at the end you'll own your vehicle. Not with a lease. At the end of your lease term you'll either need to buy the car outright (you can finance it like a used car purchase) or trade it to start a new lease.
Most leases are limited to 10,000 to 12,000 miles annually, and if you go over, you have the potential to be charged $0.15 to $0.25 per 1 mile at the end of your lease agreement, which can add up quickly.
At the end of your lease, you are required to turn the vehicle in a good, non-altered condition.
If you decide you don't like your vehicle, or are unable to continue your lease agreement, you'll be forced to pay a high penalty.
Buying: Pros & Cons
When you're leasing a car, you're borrowing it for a few years—but buying a car means at the end of a few years, you'll have no more car payments, AND you'll have a car to drive around free and clear.
Want to add a spoiler or change the color of your vehicle? It's your choice—you own it.
At the end of a lease agreement, you'll either have to lease another car, or pay the difference to keep the car you have.
Pay a little more each month and you can drive cross-country as many times as you'd like. The mileage might bring your warranties to an end sooner, but there is no penalty to pay when your financing is up.
If you buy a car and decide it's not right for you, you can sell it— even if you're financing it. The challenge of leasing versus buying a new car is you'll be upside down on the purchase of a new car for the first few years, but you'll own it sooner and can sell it when you want.
When you buy a car, most manufacturers ask for a down payment of 10% to 20% of the value of the vehicle.
Financing on a new car includes both a payment toward the total value of the vehicle along with an annual percentage rate (APR). The higher your credit score, the lower your APR and ultimately your monthly payments. But, since car leases do not include these percentage rates on the vehicle price, their payments can sometimes be hundreds of dollars lower.
If you lease a vehicle, you'll usually turn it back in before maintenance costs start adding up. With a purchase, you'll most likely keep a vehicle long after the manufacturer warranties end and you'll be paying for all upkeep out of pocket.
When you drive a new car off the lot, it begins depreciating rapidly—some makes and models more quickly than others.
When you are ready for a new vehicle, whether it's a few years or a decade after your purchase, you will be responsible for researching and handling trading in or selling your car.