Deciding whether to lease or buy your next vehicle can be a difficult decision. For a lot of people, the confusion comes from a fairly simple lack of understanding of what a lease is and how it works. However, understanding whether to lease or buy can actually be quite simple. It really all comes down to you and your lifestyle.
Leasing a new car finances the depreciation of the vehicle over a set time period. Purchasing a car finances the entire value of the car.
On a fundamental level, leasing a new car finances the depreciation of the vehicle over a set time period. Purchasing a car finances the entire value of the car. At the end of your leasing period (typically 36 months), you return the vehicle and stop making payments or opt to purchase the vehicle. As we’ll review further on in this page, leases actually have loads of benefits for a lot of people. However, people tend to stick with the purchasing process because it’s what they’re most familiar with. Both options have their benefits and drawbacks. With these fundamental differences, how do you know whether to lease or buy? Well, it all depends on you, your lifestyle, and your resources.
- Short-Term Use
- Lower Payments
- Excess Cash
- Stay in Warranty
- Latest Features
- Pay Less Taxes
- Unrestricted Mileage
- Unrestricted Modifications
- Long-Term Savings
- Freedom to Sell
- No End of Term Fees
What is a Lease?
A lease is an agreement to allow a lessee (you) to use an asset (the vehicle) that another entity owns. In the situation of leasing a vehicle, lessees are essentially paying for the depreciation of the vehicle. This is why lease agreements tend to have significantly lower payments than purchasing. How are the costs of a lease determined? Since you’re financing the depreciation of the vehicle, the lease agreement pays for the difference in the purchase price of the vehicle and the expected value of the vehicle at the end of your lease term.
Leases are generally divided into just a few components. Leasing a vehicle has annual mileage restrictions. This is because the value of the car at the end of the lease will be lower if the car has higher mileage. Mileage restrictions typically range from 10,000 miles per year to 16,000 miles per year. For those who would like some flexibility, you’re able work out unique mileage restrictions for your particular situation. Another component of the lease is the time period that the lease spans. Typically leases are around 36 months in length.
In addition to mileage restrictions, leasing also places restrictions on modifications to a vehicle. Since the price of your lease is determined by the anticipated value of the vehicle at the end of its term, modifications are usually limited because they affect that value. If you’re someone who likes to modify their car, leasing is probably not the option for you.
So why go through the hassle of the mileage and term restrictions of a lease? Well, for people who don’t mind them too much, leasing offers loads of benefits over buying. Short-run benefits to leasing that we’ll review later ensure that lessees are always in the latest vehicles with the latest features. Lessees will almost always operate a vehicle within the vehicle’s warranty period. Lessees almost always have significantly lower payments than purchasers. Also, when your term expires, you simply turn your vehicle in and begin another lease (or buy) a new vehicle. For a simplified breakdown on the lease or buy question, continue.
Lease or Buy Simplified Example
Let’s break down the lease or buy question with a highly simplified example. In this example, we’re considering a $30,000 car and we’re deciding whether or not we should lease or buy it. This example breaks down the financial implications of the lease or buy decision. However as you’ll read later, deciding whether to lease or buy a vehicle often comes down to your lifestyle and your wants. Keep in mind that this example is highly simplified and does not include taxes, fees or interest.
- Buy Example: If you’re looking to buy a $30,000 car, you’re going to have to finance $30,000.
- Lease Example: If you’re looking to lease a $30,000 car, you’re going to finance the expected depreciation over the terms of your lease agreement. At the the time that we form our lease agreement, we anticipate that the car is going to be worth $20,000 in 36 months. We’re also placing a limitation on mileage to under 12,000 miles per year. This means that you only finance the difference in values. In this scenario, you’re only going to finance $10,000 ($30,000 – $20,000).
Since you’re financing so much less with a lease, your payments are going to be significantly lower. In this highly simplified example, the purchaser is going to pay $500 per month for 60 months. A lessee would only pay $277.78 per month for 36 months. Total out of pocket over 36 months for the lessee is $10,000 whereas the purchaser pays $18,000 and still owes another $12,000 over 24 months. This explains why lease payments are so much lower than purchase payments.
So what are the implications of this example? Well, because we haven’t factored in things like taxes or fees or interest, both of these options are at a level playing field at the end of the 36 month period. If the lessee returns the vehicle, the lessee is out the $10,000 that was already paid. If the purchaser wants to sell the vehicle, the purchaser could (possibly) sell it for the $20,000 end of term expected value. However, this is just simulation and isn’t yet accounting for taxes, interest and fees. Other implications of this example show that people who would like to constantly be in the latest vehicles are better off leasing. This is because they pay significantly less in payments and they get the convenience of simply returning the vehicle to the dealer at the end of the term. Leasing benefits short-term ownership (or usage).
Let’s Complicate the Lease or Buy Example
In the above example, you’re going to break even with purchasing if you’re able to sell your car for $20,000. However, in the real world there are additional costs to consider. When you purchase a vehicle outright, you pay taxes on the full cost of the vehicle. When you lease a vehicle, you pay taxes on the amount financed. If you add on a 7.125% sales tax in this example, the buyer is going to pay an additional $1,282.50 over 36 months or $2,137.50 over the full 60 months. On the other hand, the lessee would only pay $712.50 in taxes over 36 months.
Similar situations may occur with varying interest levels. Buyers pay interest on the entire $30,000. Lessees have the opportunity to get a lower interest rate when they begin their next lease agreement. When you finance the purchase of a vehicle, your interest is termed as the interest rate. Lessees pay a differently termed money factor or lease rate on the amount being financed. There are also fees associated when you lease or buy a new vehicle. For specifics on the fees you’ll encounter, speak with a member of our staff for a better understanding. In many cases with leasing, fees, taxes and interest are rolled into the monthly payments.
So What Should I Do, Lease or Buy?
So, with all of this information, how do I know whether to lease or buy? It comes down to you. For people who are interested in getting a new car every few years and don’t mind operating within mileage restrictions, leasing is probably the best way to go. You’ll get the latest features, lower payments and more excess cash as a result. If this sounds like you, your answer for the lease or buy question is probably lease. However, lessees don’t actually own the vehicle. They won’t have the freedom to drive as much as they want without fees and they won’t be able to modify their vehicles. At the end of your lease, you’ll be able to purchase the vehicle if you please, but leasing-to-buy is typically not as cost efficient as buying from the start. When you lease a vehicle, you lack long-term cost efficiency because you’ll always be making payments. If you want to have the latest tech gadgets and features, there’s no better way to go.
When you purchase a vehicle, long-term buyers get the benefit of actual ownership. Buyers have free reign over their vehicle, with the ability to drive as much as they want and modify the vehicle as much as they want. Buyers don’t have to worry about end of term fees if the car isn’t maintained properly, because there is no end of term. Long-term cost efficiency is very high for buyers who decide to keep their cars. Eventually your payments will fizzle out and you’ll have no more car payment. Car purchasers are also able to sell the vehicle whenever they please.
Financially, whether or not to lease or purchase typically comes down to how long you intend to own or use (lease) the vehicle. The lease or buy question can often be answered by acknowledging how frequently you intend to replace your vehicles.
- Short-Term: For those who like to replace their vehicles frequently, leasing is probably the better financial option for you. Your vehicles will always be under warranty, have the latest features and your payments will be lower. Lease or buy? Lease is usually better for short-term users.
- Mid-Term: For those who want to keep their vehicle for more than a few years, leasing or buying are both good options. One of our lease deals that we offer is going to be a great option for mid-term users. Lease or buy? Choosing to lease or buy can both be viable options.
- Long-Term: For those who don’t mind keeping a vehicle for a long time, buying the car to spread out the cost is usually the better option. Lease or buy? Buying is typically better for long-term users.
Benefits and Drawbacks to Leasing
Aside from the short-term financial benefits of leasing, let’s take another look at the other benefits and drawbacks. The other leasing benefits and drawbacks may sound a bit redundant if you’ve been reading through this whole document.
Leasing has quite a few benefits to it. You’ll always be in the latest vehicle. You’ll always have the latest safety features for you or your family. Your vehicle will be up-to-date with the latest tech. Your vehicle will almost always be under the manufacturer’s warranty. Your payments will be significantly lower than if you were to purchase the same vehicle. Lower payments mean you’ll have excess cash for spending or investing. If you fall in love with the vehicle, you’ll be offered the ability to purchase the vehicle at the end of your lease agreement.
Leasing drawbacks are long-term costs and mileage and modifications restrictions. Long term costs exist because you’re paying to have the latest vehicles. If that’s what interests you anyway, then leasing is the way to go.
Benefits and Drawbacks to Buying
The benefits of buying a new car come from the actual ownership of the car. When you purchase a new car, you have the freedom to drive and modify the car as much as you please. You’ll also have the freedom to sell the car whenever you’d like. The biggest benefit of purchasing the car is that the costs can be spread out over a long period of time. In the long run, buying will usually save you money over leasing.
The drawbacks of purchasing a vehicle are that your payments are going to be substantially higher than a lease. Eventually, if you want another car, you’ll have to go through the whole selling process. If you’re the kind of person with the lifestyle and resources to continuously be in the latest cars, leasing is probably the better option for you.