If you’re looking to buy a new car, the salesperson you work with may suggest you lease the vehicle, rather than financing it with a loan. Leasing is a worthwhile consideration when you’re browsing lots full of new cars, but you want to make sure you know the differences between your choices before you commit.
Here are three major aspects of new-car financing to consider before choosing a loan or a lease.
1. Look Beyond Monthly Payments
It’s easy to make decisions based on your monthly budget, but that’s not always the right way to go. As far as monthly expenses, a lease is probably going to be the cheaper option: loan payments among the most commonly leased cars are often much higher than the lease payments for the same vehicle. For example, the average loan payment for a Honda Civic, the most commonly leased new car, was $347 a month, while a lease cost $251 a month, according to first quarter data from Experian Automotive. Several popular cars had an average difference of more than $100 between monthly lease and loan payments.
But there’s more to cost than just the monthly payment. Money will always be a strong factor in the decision; you just have to make sure you’re considering all of it.
“I think the biggest mistake people tend to make when getting a loan is negotiating the monthly payment instead of negotiating the price of the car and looking at the loan rates,” said Melinda Zabritski, senior director of Experian Automotive.
Driving over your lease’s mileage limit results in fees that could wipe out any savings you took from the lower monthly payment. Some leases include maintenance that you may otherwise have to cover on your own if you buy the car. With a car loan, you may be able to finance 100% of the cost, while a lease may require you to put down money upfront.
Every individual, vehicle and financing plan is different, so make sure you take in the big picture before deciding what gives you the most value for your money.
2. Consider How You’ll Use the Car
Some people like driving their cars until they fall apart. Others just want a comfortable vehicle to drive around town and are happy to ditch it after a few years. The first consumer is better suited to buy, while a lease may make more sense for the second kind of person.
When either sort of person hits the car lot, he or she needs to have an accurate idea of their driving habits.
“You really have to know your driving patterns,” Zabritski said. “Does a lease truly fit your lifestyle?”
You need to know how many miles you drive a year so you can assess whether or not a lease is realistic for you: A frequent road-tripper could end up with a serious bill at the end of the lease.
Leasing also opens up a lot of options to drivers.
“I really encourage a lot of my friends to consider a lease,” said Dinos Constantine, chief operating officer of Holler-Classic Automotive Group in central Florida. “You may wish to consider a certain vehicle, but you may not be fully in love. You may see something on the lot you want to try. Leasing gives you that exit. You always have the option of buying out that vehicle.”
By “exit,” he means the option to move on to another car at the end of your lease or buy the car if you don’t want to part with it.
Of course, what kind of financial decision would buying a car be if you didn’t have to think about taxes? If you heavily use your car for business purposes, you may want to consider leasing, said Gail Rosen, a certified public accountant in New Jersey.
“There is a definite tax advantage of leasing over buying a car,” she said, “especially the more luxurious — expensive — the car is.”
The loophole depends on the cost and weight of the vehicle, but if you use your car for business, you should look into the details. You will potentially be able to write off much more of your payments than if you were making loan payments.
3. Read the Fine Print
Pay close attention to your lease agreement, because that fantastically low monthly payment may be tied to a very low mileage allowance. You also want to be aware of penalties for turning in the car early and your responsibility for maintenance.
“You’re going to end up paying a lot more at the conclusion of that lease than you would have if you set it up properly and just paid a little bit more per month,” Constantine said.
This goes back to the idea that you need to be prepared before car shopping. Not only should you know your driving habits, but you also need to know your credit standing. Those who leased the most common vehicles often had a lower credit score than people who took out loans for the same car, but leasing is overwhelmingly considered a product for the credit elite.
Even if you’re not thinking of leasing, you should try to walk into the car salesperson’s office with the best credit standing possible, so you have better chances of getting approved and decent loan rates. The more prepared you are, the better, so it helps to track your credit score well in advance of car shopping. If you want to monitor and improve your credit standing, you can get your credit data for free through Credit.com, which allows you to track your progress from month to month.
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