If it’s time for a new set of wheels, with it will come the inevitable question: Should I buy or lease a car? It’s important to do your research before you decide which option makes sense for you and your budget. And although we would all love a brand new sports car every couple of years, is that financially realistic or responsible?
Unlike purchasing a home, which can be a sound financial investment, a car automatically depreciates once it is driven out of a dealership’s parking lot. When you’re making your decision, consider these factors that could change the way you think about leasing.
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1. Less money upfront: Typically, leasing a car requires a lower down payment (if any at all) than purchasing. Additionally, the sales tax is lower because you pay based on the used value of the car.
2. Lower monthly payments: Month to month, leasing is less expensive than making a car payment, so a lease can save you money on a monthly basis.
3. Easy turnover: Leasing is an attractive option because you can lease a new car every couple of years. When it’s time for a change, you don’t have to worry about selling the car or trading it in because the dealership manages these hassles.
4. Less maintenance: Generally, leased cars are newer models and require less maintenance. In addition, most leased cars are under warranty for about three years, which is a normal lease period. Owning an older car can incur expensive repair bills.
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1. Insurance issues: Insurance covers the car’s market value, which means if your car is damaged or stolen, insurance may not cover the total of what you still owe on the lease. So the lease agreement may include gap insurance to pay the remainder of the lease in case of major damage, which raises the monthly lease payment.
2. Limited mileage: Too much wear and tear can rack up charges from the dealer. For example, dealers usually limit the distance you can drive a leased car to approximately 12,000 miles per year with a fee for each additional mile.
3. One-way drive to nowhere: Unlike owning a car, the monthly payments never stop. If you decide to buy a car, eventually you will pay off the loan and own the car. Although the purchased car will have depreciated over time, by the end of the payments it’s likely that the car will still be worth something. However, if you decide to lease, the payments leave you with no equity when the lease ends.
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4. Minimal flexibility and liquidity: If you decide to terminate your lease early, there can be an early termination fee. Another sticky component to many lease agreements is if you total the car, you have to finish the monthly payments according to the dates in the contract even though you no longer have a functioning car.
Leasing initially appears to be the less expensive and more attractive option, but when weighing the long-term benefits of both, buying a car saves money if you can afford to purchase it. You can think of this model in terms of renting an apartment: Each time you rent a new apartment, there are added payments, such as a broker’s fee and moving expenses. Similarly, each time you lease a new car, there are additional fees. Also, leasing, like renting, leaves you with no equity — home or car — in the end.
Do your research to decide which option best fits your lifestyle and financial stability. Refer to a car expert, like Edmunds.com, for a thorough analysis and comparison of the options.
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