Should You Buy or Lease a Car?

Most experts agree that buying a car outright is the best choice financially; however, there are questions you need to answer before making a decision to buy or lease a car. While paying for a car with cash may save the most money in the long run, do you have the funds to purchase a car without a loan?

Typically, to buy a car with a loan, you need to have a 10- 20% down payment. Leasing may require a low or no down payment. There are exceptions, so check out what is available for the vehicle you want to purchase. Since the monthly loan payment is based on the value of the car while the lease payment is based only on the depreciation of the car, you may have a higher monthly payment if you buy. Your monthly cash flow will be affected by this decision. When you purchase a car, you build equity and can keep, sell or donate the car at the end of the loan. In most cases, the longer you keep your car, the more you save. The amount of savings depends on the value of the car when you sell it. Selecting a vehicle to purchase that stays reliable and holds it value well maximizes your savings.

An important question to answer before buying or leasing, is how much do you drive in a year? Leases have between 9,000 to 15,000 miles per year caps, with 12,000 miles being the standard. If you drive more than that, a mileage charge of 10- 50 cents per mile is levied. (20 cents is the typical per mile penalty.) Depending on the mileage, this can be very expensive. You may be able to prepay mile overage for less money at the lease signing, if you know that you will exceed the caps. However, you do not receive credit for unused, prepaid miles. You have no mileage caps when you purchase a car. Keep in mind though, that high mileage cars are worth less, if you want to sell or trade in your purchased car. If you lease a car and want to purchase it at the end of the lease, loans on used cars have higher interest rates.

How well do you maintain your car? If you lease a car, you are expected to return it in its original condition. While the car can show normal wear and tear, you can be held responsible for up to 3 months lease payments for excessive wear and tear. Although some leases may include free oil changes, you must maintain your car including tires, etc. The manufacturer’s warranty usually covers other repairs. Car leases typically have specific automobile insurance requirements. Insurance costs for leased cars may be more expensive, but not always. Check with your insurance carrier. If you decide to purchase a new car, you may wish to obtain extra insurance coverage to provide brand new car replacement, in case of an accident. If you use your car for business, buying and purchasing have different calculations for depreciation and interest deductions. The Internal Revenue Service (IRS) provides information online or you can consult with your tax professional for advice. Leasing may provide tax advantages for business owners.  Leasing a car results in looking for a new car every few years as each lease ends. This is one reason a car salesman may push a lease. You will, most probably, be back to lease again in a few years. You do not have to worry about selling or trading in the car at the end of a lease, you just turn the car in. However, as long as you lease one car after another, monthly payments continue. If you need to get out of a lease before it ends, you may be stuck with thousands of dollars in early termination penalties and fees, potentially equaling the amount of the entire lease.

If having the latest technology or always driving a late-model car is critical to you, leasing may be the best option. If saving the most money is your priority, then purchasing a car may work best for you. Also consider that the down payment requirements, monthly cash flow, equity build up, mileage, maintenance, business use deductions, and latest technology requirements. There are online calculating tools available to help with your decision.

Additional Resources:
Lease vs. buy car calculator- https://financialmentor.com/calculator/lease-vs-buy-car-calculator

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