Buy or Lease? The Smart Way to Finance a Car

Searching for a new car is a multi-faceted process. There are many issues to consider: choosing a reliable make and model, deciding how much to spend, and of course, financing. The decision to buy or lease requires some research. Review the pros and cons of each choice below. They will help you make an educated decision.

Buying

Dealership financing is the most common way to purchase a car. Whether you’re buying the latest model or a pre-owned vehicle, keep the following in mind:

Pros:

  • Equity. Buying a car means gaining equity, allowing you to sell or trade it in in the future.
  • Flexibility. Owning your car means flexibility: the ability to detail it, improve the sound system and drive as much as you like.
  • Lower premiums. Insurance is usually more affordable when buying vs. leasing.

Cons:

  • Higher costs. You may save money on insurance, but you’ll still need to come up with a sizable down-payment to secure a deal. Your monthly payments are also likely to be higher compared with a lease option.
  • Depreciation. The value of a car decreases rapidly, preventing you from recouping your full investment during a sale or trade-in.
  • Repairs. Unless your car comes with a warranty (which we recommend), you’ll be paying to cover mechanical problems, maintenance, dings and scratches, and everything in between.

A caveat of buying a car includes:

Paying cash. You are an outlier—one of the lucky few who can afford to pay cash for a new car. Congratulations on your fortunate circumstances. While we admire your buying power, it’s important to consider the implications of writing a very large check. Is this the best use of your money? Although you will avoid paying interest on a car loan, you will also miss the opportunity to invest your money and earn a larger profit. Consider the following example:

Kevin has decided to buy a $25,000 car. His aunt recently gave him a large sum of money and he plans to use his inheritance to fund the purchase. After hearing this news, his aunt warns him against the decision, reminding him that investing the money over 10 years could earn him an average of $20,000 in returns.

The moral: Don’t ignore your options. Consider other avenues before choosing this path.

 Leasing

Pros:

  • Affordability. Leasing a car is typically cheaper than buying when it comes to monthly payments. Some lease agreements also waive down-payment requirements.
  • Credit flexibility. Customers with lower credit scores will have better luck securing a lease than regular financing.
  • Tax breaks. Frequent business travelers can write off leasing expenses, allowing them to save even more during their term.
  • No depreciation. Unlike regular financing, lease payments are meant to cover depreciation only, i.e., the wear and tear on the car during your lease term. This means you will literally get what you pay for and won’t have to worry about losing money on a long-term investment.

Cons:

  • Driving restrictions. Most lease agreements come with mileage clauses that penalize you for excessive driving. Surpassing your limit is likely to come with a hefty bill.
  • Liability. Examine your driving skills before considering a lease. An accident not covered by insurance will be your burden to bear. You’ll also pay for small damages like seat marks, water stains, and other basic mishaps.
  • Higher premiums. While your monthly payment may be low, your insurance premiums are likely to increase.
  • Never-ending car payments. A lease agreement has no payoff date, forcing you to set aside hundreds of dollars each month to cover your payments. If you are looking to tighten your budget, leasing is not the best long-term plan.