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The Difference Between Buying and Leasing Cars

  July 26

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buying and leasing carsThe following is a guest post from Tammy Lee Dawson. If you’d like to guest post on Budget Blonde, please e-mail me at Cat[at]BudgetBlonde[dot]com.

Editor’s note: This post was pretty timely since a few days ago I revealed that I spend a whopping $500 on my car lease in Grenada every month! Crazy! So, when Tammy pitched this topic, I was all for it. Enjoy!

Cars – for some it’s a luxury and, for many, it is considered a necessity. Either way, it can be quite a purchase and, if not taken care of properly, can shape the state of your finances for years to come. Many individuals are leasing vehicles with the hopes of reducing spending, which got me thinking:

Is leasing REALLY the more cost-efficient option?

After doing some digging, the answer I came up with is “maybe”. Depending on your lifestyle and preferences, there are factors that dictate whether it is wiser to buy or lease your next vehicle.

Leasing

It starts off with a very low or no down payment, which extends to lower monthly installments and different warranties. For people, who regularly like to change their cars (e.g. in 3 to 5 years), leasing is the perfect opportunity. It saves the hassle of maintaining the car and selling it off.

To get a car on a lease is relatively much easier than getting a car loan and allows you to enjoy any car’s optimal years of performance and later move on to another, better or an upgraded car. Due to the smaller down payments and independence from maintenance, you do not have to restrict yourself to the cars that you can afford; instead you could enjoy the luxury of different cars for a short amount of time. However, let’s not forget that, even if you have been leasing a vehicle for ten years, you will have nothing to show for it the moment your payments stop. Also, there are preset terms and conditions that limit the car’s use, starting with the fact that every extra mile beyond the agreed mileage costs extra. The insurance premiums are significantly greater and in case of a major accident, they only pay for the residual value which may not be sufficient to cover up the amount you owe to the leasing company. Since the agreement may be as long as 10 years, you need to ensure financial stability and the inability to maintain the agreement would result in a serious penalty; in recent times though, companies like Lease Trader actually allows individuals to take over their lease, much in the same way someone sublets an apartment.

While leasing is great for many different living situations, it is particularly ideal for those who move around a lot for work or pleasure, or don’t want to worry about the hassle of upkeep.

Buying

The primary concern to buy a car is to arrange the required finances. Even if you do not pay the complete payment upfront, you would still have to make a significant down payment and follow this with monthly payments. The nice part, though, is that after a significant amount of time, you will own the vehicle you’ve been paying for. Your credit score will play a significant role in your ability to get a car loan and the monthly payments that accompany it. If your history is not yet fully established or is less-than-ideal, you’re not completely out of options, since there are companies like Auto Credit Express that help people get loans even if they have poor credit.

So, if you’re someone who takes good care of things (and cars), buying may be a viable option. After all, if you keep the vehicle in tiptop shape, it will suffer little depreciation and can be sold at a future date. Furthermore, there is the added advantage that the insurance premium on bought cars is relatively lower.

Essentially, there is no clear cut answer on whether buying or leasing is more financially sound. If you need a car now but cannot guarantee that it will be needed three years down the line, leasing may be the route to go. However, if you have settled into a rhythm and want a more lasting solution to your transportation needs, taking the leap and buying a car may be the wiser move in the long run.

So what do you think? Have you ever leased a car? I know the general consensus in the PF community is that it’s a bad idea, but I feel like it works for some.

Photo Credit: FreeDigitalPhotos.net

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8 responses to “The Difference Between Buying and Leasing Cars

  1. Yep, I also agree that buying tends to be the better option for most people. Leasing would be a terrible decision in my case — I commute 80 miles a day, so I would use up my mileage allotment well before the lease period had expired.

  2. I have kept a car for less than a year, and leasing would probably have been cheaper. But I didn’t know at first it would be for such a short time!

  3. I plan to keep cars that I purchase for 7+ years, so buying is the way to go for me. It is true, however, if a person truly will not keep a car for more than say, 3 years, that leasing is a viable option.

  4. I lease my Rav4. I drove a Honda Civic for about ten years, then a Toyota Corolla for another ten. When my Corolla died, I really wanted to get a nicer car, spacious for the boys, safe, and with lots of trunk space for groceries and what-not. The smart thing to do would have been to go to Carmax and buy something used for under 10k. Instead I got a $250/month lease for a top of the line Rav4. It’s money that would be better spent somewhere else (can you say kids college fund???) but I can at least say that I do really enjoy the car. 🙂

  5. This is one of the topics I actually train on in my day job. I just got out of my lease and while they work for some, I don’t think I’LL ever go back to one. F&I Managers also have this SNEAKY little way of getting profit from the back-end. The average consumer thinks there’s no interest rate for a lease. Technically there isn’t. BUT, there is what’s called a “money factor” that’s added to the payment. Guess what – multiply that money factor by 2400 and what do you get? An APR. They’ll even quote it differently to make it sound better. So if the money factor is .00275, they’ll quote it as 2.75 so people think they’re getting a better deal. Those sneaky dealers..I could go on and on.

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