Apart from choosing the vehicle itself, the most important decision that you’ll make is whether you buy or lease your next car. In the end your financial situation will ultimately determine the viability to buy outright, loan or lease. This article will try to demystify the pros and cons of both buying options and hopefully allow you to make an educated and informed decision on your next car purchase.
First Ask Yourself These Questions.
What is your monthly budget?
Determining your realistic budget will place you into a market for a specific range of vehicles. If your budget is $500/mo you’re likely not looking at that BMW X1 or that Ram 1500 Outdoorsman. You’re most likely to be into the compact sedans and SUV’s from Hyundai, Toyota, Jeep or Kia. It’s also important to ensure that you are able to afford payments for the duration of the loan or lease period.
What is your primary reason for needing a vehicle?
Assessing need is an important element to determining how you purchase your car or truck. If you need a comfortable car to commute back and forth to work, you’ll likely benefit from lease since you’ll put minimal wear and mileage into the vehicle.
Alternatively if you drive far and often or need a vehicle for construction or need it to operate where conditions might include rough roads or harsh condition, it’s possible that a purchase plan is best. In these situations it’s highly likely that you may put the vehicle through increased wear and tear that would fall outside of a lease agreements acceptable use policies.
Your budget and driving application will determined which car or truck you can afford as well as whether a lease or loan approach will be most appropriate.
The Pros and Cons of Leasing a Vehicle
In a leasing situation you are paying down the depreciated value of the vehicle over the ‘rental’ period which is far less than the outright cost of the car or truck.
- A lease gives you the opportunity to trade in your vehicle for a new shiny ride at the end of the contract. Every few years you’re rolling in that sweet, new car smell.
- Leased vehicles are generally under full warranty during the entire lease period. This can certainly save you a ton of cash in the years after the initial loan is paid off in a buying situation.
- Lease payments are generally much lower than a loan as you are only paying out the difference between the new purchase cost and the depreciated value of the car and not the entire cost of the car divided by the loan term.
- The sales tax for a leased vehicle is considerably less than you would pay for a loan on the entire cost.
- Leasing can be more expensive during the same period due to steeper initial costs and higher financing fees.
- Early termination penalties can be extremely expensive so be sure to ask about these.
- Mileage restrictions on leased vehicles can limit their usage.
- At the end of the lease period you must either transfer to a new lease or enter into a financing agreement to pay of the remaining cost of the vehicle.
- Stringent definitions of ‘normal wear and tear’ can result in heavy additional costs at the end of the lease period.
The Pros and Cons of Buying a Vehicle
In a loan situation your payments are based on the total cost of the vehicle. For example, a loan amortized over 36 months on a truck worth $18,000 would carry a monthly payment of $500 from beginning to end.
- The vehicle is yours to do with what you please. Pinstripes, fancy rims or supercharger; it’s yours to customize and modify.
- You’re free to sell or trade the car anytime without fear of harsh, early termination penalties.
- Predefined limitations on wear and tear are not a concern as are mileage restrictions.
- You can pay off the entire loan at any time without penalties.
- The end of the loan term results in complete, untethered ownership and end of payments.
- There are fairly high upfront costs such as down payments on the loan, sales taxes, vehicle registration and other transaction fees.
- Loan payments on purchased cars are usually higher that they would be for the same leased car because you are financing the entire price of the vehicle rather than only a part of that cost.
- Over longer periods, maintenance costs will go up as the warranty expires and wear and tear begins to take its toll on the drivetrain and braking systems.
Ultimately it will be your own financial capabilities and driving needs that will determine the best course of action. However, there are still some very important pieces of information to have on hand prior to signing any new car contract, so make sure you’re prepared.