The choice between buying and leasing a car is often a tough call. On the one hand, buying involves higher monthly costs, but you own an asset—your vehicle—in the end. However, a lease entails a never-ending cycle of payments for the vehicle, even though the lease has lower monthly payments and allows you to drive a vehicle that may be more expensive than you could afford to buy. The trend of people opting for leases rather than loans is continuing, as evidenced by the fact that more people now choose them than they did a few years ago. In this article.
Buying a vehicle with a conventional car loan is pretty straightforward. You take out a loan from a bank, credit union, or other lending organization, and you pay back the loan each month for a predetermined period of time. Each payment has a portion applied to principal reduction and a portion paid toward interest on the loan. The higher the interest rate, the higher the payment. As you repay the principal, you build equity until—by the end of the loan—the car is all yours. You are free to keep the car for as long as you like and to treat it however you see fit. The only consequences for alteration or misuse might be future repair costs and a decreased value.
Leasing a new car is an option even though new car prices are still high (more than $47,400 in January 2024, according to Cox Automotive), even though they are trending lower. However, when compared to 2020 and 2021, the percentage of all new cars that are leased decreased in the third quarter of 2022, according to Experian, one of the credit reporting agencies.
With a lease, buyers make a monthly payment to drive a new car for a set term. Though buyers must return the car at the end of the lease term, that payment is frequently less than the monthly cost of financing a new car.
Since many people work from home, many consumers may not be concerned about a lease’s mileage limitations. Quite the opposite: They might find that they don’t use the miles they have paid for.
The predictability of the payments and ownership costs (no expensive repairs when under warranty!) has its appeal. However, life can be unpredictable, and a lease has less flexibility than a purchase.
We weigh the benefits and drawbacks of leasing versus buying to help you decide which is best for you.
Leasing a car can be a tempting option, especially with the allure of lower monthly payments and the ability to drive a newer, more luxurious vehicle However, the seemingly attractive initial cost often masks the hidden expenses that can make leasing a surprisingly expensive choice in the long run.
This guide delves into the reasons why leasing can be so costly, helping you make an informed decision about whether buying or leasing a car is the right choice for you.
The Hidden Costs of Leasing: A Breakdown
1. Depreciation: The biggest factor driving the high cost of leasing is depreciation. When you lease a car, you’re essentially paying for the difference between the car’s value when new and its expected value at the end of the lease term This depreciation can be significant, especially for luxury or high-performance vehicles
2. Mileage Restrictions: Most leases come with mileage restrictions, typically ranging from 10,000 to 15,000 miles per year. Exceeding these limits can result in hefty per-mile charges, adding to the overall cost of the lease.
3. Early Termination Fees: Breaking a lease early can be a costly affair. Early termination fees can run into thousands of dollars, making it a significant financial burden if you need to get out of the lease before the term ends.
4. Charges for Wear and Tear: Most leases stipulate that you must return the car in good condition with typical wear and tear. Exceeding this threshold, though, may result in higher repair or wear and tear costs.
5. Hidden Fees: Be cautious of additional costs related to leases, such as those for documentation, acquisition, and disposal. These charges can add up quickly, increasing the overall cost of the lease.
6. Lack of Equity: Unlike buying a car, leasing doesn’t build equity. In essence, you’re paying for the privilege of using the car for a predetermined amount of time, with no ownership rights at the conclusion of the term.
7. Customization Limitations: Leasing often restricts your ability to customize the car. It may be against the law to add accessories or make changes, or they may need to be taken out before returning the car.
8. Interest Rates: While lease interest rates are typically lower than loan interest rates, they still contribute to the overall cost of the lease.
9. Maintenance Costs: While some leases might cover routine maintenance, others might require you to pay for it out of pocket. This can add to the monthly expenses associated with leasing.
10. Insurance: You’ll need comprehensive and collision insurance for a leased vehicle, which can be more expensive than liability-only coverage for a car you own.
Leasing vs. Buying: A Cost Comparison
Leasing:
- Lower monthly payments
- No down payment required
- Ability to drive a newer, more luxurious vehicle
- Less hassle with maintenance and repairs
Buying:
- Higher monthly payments
- Requires a down payment
- Vehicle depreciates in value
- Responsible for maintenance and repairs
When Leasing Makes Sense
While leasing can be expensive, it can be a viable option in certain situations:
- Short-term driving needs: If you only need a car for a few years, leasing can be a more affordable option than buying.
- Frequent car upgrades: If you enjoy driving the latest models, leasing allows you to upgrade to a new car every few years without the hassle of selling your old one.
- Tax benefits: In some cases, leasing can offer tax benefits for businesses.
- Lower upfront costs: Leasing typically requires a lower upfront investment compared to buying.
When Buying Makes More Sense
Buying a car is generally the more cost-effective option in the long run, especially if you:
- Plan to keep the car for an extended period.
- Drive a lot of miles.
- Want to build equity in a vehicle.
- Prefer to customize your car.
- Are comfortable with the responsibility of maintenance and repairs.
Making an Informed Decision
Before deciding whether to lease or buy a car, carefully consider your individual needs and financial situation. Analyze the total cost of ownership for both options, including monthly payments, down payment, depreciation, mileage restrictions, and other associated fees. By understanding the hidden costs of leasing and comparing them to the long-term benefits of buying, you can make an informed decision that aligns with your financial goals.
The Upside of Leasing
On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back any principal. Rather, you are only borrowing and paying back the finance charges plus the difference between the car’s residual (its expected value at the end of the lease) and its original value. The major advantages of leasing include:
• You drive the car during its most trouble-free years.
• You’re always driving a late-model vehicle that’s usually covered by the manufacturer’s new-car warranty.
• The lease may even include free oil changes and other scheduled maintenance.
• You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
• Your vehicle will have the latest active safety features.
• When it’s time to move on, you don’t have to deal with the hassle of selling the car or worry about changes in its trade-in value.
• There could be significant tax advantages for business owners.
• At the end, you just drop off the car at the dealer.
Difficult Comparison Between Car Loans and Leases
It’s difficult to make a fair head-to-head comparison between, say, a six-year loan and the standard three-year lease. When the lease expires, the lessee must find another vehicle or possibly accept the lease’s buyout offer, but the bank borrower still has three years of payments to make.
A lease can also be subsidized, or “subvented. The carmaker may increase the residual, deduct money from the top with a special rebate only for lease agreements, or do both.
An automaker may also kick in extra rebates on a lease deal—rebates not available to a loan customer. Furthermore, it is nearly hard to compare the “money factor” (interest rate) on a lease and the interest rate on a loan because they might differ.
Generally speaking, it will cost thousands more to lease a car twice in a row for three years than it will to purchase it outright or with a loan and own it for the same six-year period. Additionally, the savings for car buyers rise if they keep the vehicle for, say, three more years (a total of nine years), even after accounting for anticipated maintenance and repairs.
If the restrictions of a lease bother you, think about purchasing a less costly new car or a well-kept used car—such as a certified pre-owned car from a franchised dealer—or obtaining a longer loan term. Whether you buy your new car outright, through a loan, or on a lease, you can save money by selecting one that is well-maintained, dependable, and has good fuel efficiency.
For savings up front and over the long haul, buy used. And pay cash.
Leasing Vs Buying A Car – Dave Ramsey
FAQ
Why is leasing so expensive right now?
Why is leasing a car the most expensive?
Is it a waste of money to lease a car?
Will car leases go down in 2024?
Is leasing more expensive than buying a car?
But when you look at the big picture — car ownership over the years — you realize leasing’s true cost. There are two main reasons leasing is more expensive over the long haul: You always have a car payment, although it’s typically lower than a purchase payment. Someone who buys a car and pays off the loan can enjoy years of payment-free driving.
Why is leasing a car a good idea?
Leasing allows a person to get a new car every few years. It can keep their payments relatively stable when leasing the same make and model of car over various leases. Leasing also frees the lessee from having to dispose of the car at the end of the lease term. What are the disadvantages of leasing?
What are the disadvantages of leasing a car?
As attractive as a lease may appear, there are a number of disadvantages: • In the end, leasing usually costs you more than an equivalent loan because you’re paying for the car during the time when it is most rapidly depreciating. • If you lease one car after another, monthly payments go on forever.
What happens if you lease a car?
When you lease a car, the leasing company holds its title. You never have an ownership interest in the vehicle. It’s like renting an apartment versus buying a house. Since the leasing company owns the vehicle, they can place strict limits on how you can use the car, how you can customize it, and in some cases, where you can drive.