Buying vs Leasing a Car 101: How to pick the BEST choice
Here’s a common questions I’m asked…is it better to lease or buy a car, and which one is a financially better move? I’ve done both, and these are my thoughts as to which one is better – enjoy! Add me on Snapchat/Instagram: GPStephan
The short answer is that it really depends on your situation and how long you plan to keep the car, but I’ll describe the pros and cons of each and what might work best with you.
Lets start with owning and buying a car. First of all, you can buy pretty much whatever car you want, unlike leasing where it’s almost always a new or newer car. Generally, unless you just buy your car outright in cash, you’ll end up financing the car. This is when you take the cost of the car, minus your down payment, and get a loan which you’ll pay off over a specific period of time – the most common being 48-72 months. And then you’ll also pay whatever state sales tax is on top of your purchase. Factor all that in…and then once you pay off your loan, congratulations – you own the car free and clear. And then when you go to sell it, you’ll get whatever price the car is worth – minus whatever you might still owe on the car.
However, a few drawbacks of this – unless under warranty, you’ll generally be responsible for maintenance and wear and tear items during your ownership, especially on an older car, and this can add to the cost…you’ll also need to pay sales tax on the purchase price upfront…and totally separate from that, your monthly payments tend to be higher with owning than with leasing.
Leasing generally works best if you’re the type of person who always wants to have a newer car every few years. If you plan to get one car and drive it forever to the ground… don’t lease your car. But depending on how long you plan to keep the car, leasing could actually save you money. With leasing, you’ll generally be leasing a brand new or newer car. You’ll usually have a down payment and then generally you’ll have a 24-36 month term where you have a fixed monthly payment, along with a set number of miles you can drive each year. You’ll need to return the car with your set amount of miles or less or risk paying fees and penalties.
Now when you lease a car, you’re not paying the full amount of sales tax upfront – which can save you a TON of money. The lease price is determined but the depreciation the car is going to see during ownership, plus some finance charges. You’re basically just paying a monthly amount of the depreciation, rather than the entire cost of the car. Therefore, with leases, you’ll generally pay LESS per month to drive the car because your financing only the deprecation…not the entire thing like when owning a car. With a lot of leases, too, maintenance is often covered…so you can pretty much just pay a set monthly price and not have to worry about normal wear and tear/maintenance costs that come up. And when the lease is done, you don’t have the hassle of needing to sell it…you just turn it back and you’re done.
So here’s my thoughts. Both leasing and owning have their own advantages and disadvantages, and what makes one better than the other is dependent on your situation. If you plan to keep your car more than 5 years or so…it’s almost always better to buy the car. Whether you buy a brand new car or an old used one, the longer you plan to keep the car, the more it starts making sense to buy it.
But if you’re like me and you want the privilege of owning a new car every few years… it’s cheaper just to lease it – it means I pay less per month since I’m only paying for the depreciation, I don’t need to pay sales tax on the entire cost of the car – only on my monthly payment, and I can simply swap it out when the lease is done to get a new one.
Ideally, for most people out there who just need a car to get from A to B…the BEST option is to buy a car that’s 3-5 years old and has already hit most of its depreciation. After about 5 years, most cars depreciate at a much, much slower pace – so buying a car like this and keeping it forever would be the most financially “sane” thing to do. Then just finance it at a low interest rate, re-invest whatever money you would’ve spent on the car, and hold it. Then when the car falls apart and you can’t drive it anymore, do it again.
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