Buying a Car vs. Leasing: The Pros & Cons Explained

Posted by Fitz Villafuerte under Guest Posts on October 17, 2012

Buying a car is such a big expense, and if owning a vehicle would serve more as a luxury rather than a lifestyle necessity, then I’d actually suggest you just lease one whenever the need for it arises.

This is the topic, which our guest post for today, tries to tackle.

Below, is an article written by Buddy, where he explains both the advantages and disadvantages of buying and leasing a car.

Let’s read what he has to say.

If you are ready to trade in your current vehicle for a new model, you may be wondering if it is better to buy or lease a car.

The fact is that both buying and leasing have a number of benefits as well as several drawbacks. When you take a closer look at what these two options have to offer, you may find that one option is better suited for your needs than the other.

Buying a Car
One option available to you is to purchase a vehicle. Buying a car is either done by paying cash for the full sales price of the vehicle as well as tax, title and license fees or by financing the vehicle with a car loan.

In many cases, buying a car with a car loan requires you to put at least some money down on the car, but some car loans are available that finance 100 percent of the car’s value.

The Benefits of Buying
When you purchase a vehicle either with cash or a car loan, the vehicle is yours to keep. Many people who purchase a car do so with the intention of driving it for many years.

Their goal may be to pay the loan off and to drive the vehicle for years without the financial burden of a car loan or lease payment.

Furthermore, you can drive the vehicle as often as you would like without concern for how many miles you put on the car. If you are buying in cash, you can often negotiate a good discount, which is one of the most common reasons for buying in this manner.

The Cons of Buying
There are a few drawbacks associated with buying a car outright. For one, the value of many makes and models will decrease rapidly over the years, and many car owners have found themselves in a position of owing more on their car than it is worth.

Take the Hyundai I30 as an example. This is a mass produced car, which is aimed at the low end of the market. So not only is it relatively cheap to buy in the first place, but depreciation will rapidly affect its resale value.

With the declining value of most vehicles, using a longer term loan or not putting sufficient money down as a down payment at purchase often results in a position of being “upside down” on the vehicle.

Furthermore, after the vehicle’s warranty expires, all repairs and maintenance costs are typically the responsibility of the car owner. As cars age, they may become increasingly costly to maintain.

Leasing a Car
The alternative to buying a vehicle with cash or a loan is to lease a vehicle. A car lease may be between one and three years in length typically, and it generally requires an up-front deposit as well as regular monthly lease payments.

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There often is a surrender fee required when you return the vehicle back to the dealership at the end of your lease term.

The Advantages of Leasing
Leasing a car is ideal for those who enjoy driving the latest and greatest models and who do not mind having a regular lease payment. When leasing a car, the dealership generally provides you with all repairs and maintenance costs included with the lease.

Furthermore, at the end of the lease term, you do not have to worry about trading in your car in or selling it. You simply sign it back over to the dealership, and you can then lease a new vehicle. Car lease payments generally are more affordable than loan payments, and this may allow you to drive a nicer vehicle than you otherwise could afford to.

The Drawbacks of Leasing
While leasing a vehicle may be ideal for those who like to drive late-model vehicles and who frequently trade in their vehicle for a newer model, there are drawbacks associated with leasing a car.

For example, when you own a car and trade it in, you may be able to recoup some value from the vehicle’s equity to use as a down payment for another car. When leasing a vehicle, all payments made toward the lease are sunk costs.

At the end of the lease, you may need to pay a surrender fee as well as a deposit on a new lease for your next vehicle. In addition, the lease terms dictate how many miles you can put on the car, and you may be charged an additional fee if you put more miles on your vehicle.

Which is Best For You?
It is important to understand how leases and loans work.

When you buy a $30,000 car, you are required to pay $30,000 in cash or to finance that $30,000 sales price in full. When you lease that same $30,000 car, however, your lease payments are not based on the sales price.

Instead, the lease payments are based on the resale value of the car. The resale value will be determined by the mileage permitted under your lease terms and the length of your lease term.

However, consider if the resale value on the $30,000 car was only $18,000. The amount financed with the lease would be the $12,000 difference between the sales price and the resale value. When looking at monthly payments, a lease is a far more affordable option.

However, to fully understand which is best, you should consider how long you plan to drive the car, how much the up-front and surrender fees are and how likely you are to drive the number of miles permitted by your lease.

It is understandable that determining whether to buy or lease a car is challenging for you.

If necessary, consider talking to your car dealership in more detail about the options for a specific vehicle. When you have both options in front of you, you may be able to more clearly see which option is best for you.

Buddy Warner resides in Australia and drives a Hyundai I30.

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Photo credits: pinheiro, rich and joits




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