Buying vs. Leasing a Car

If one of your financial goals is planning for a vehicle, a main component to consider is whether you should buy or lease. There is not always one correct answer in this scenario. Many of the advantages and disadvantages depend upon your own wants and needs. Evaluating the factors discussed in this article will help you make an informed decision to help you achieve your financial goal.

Two frequently used ways to purchase a vehicle include buying it outright with cash or obtaining an auto loan. Financing a car by using an auto loan is usually the most common and typically requires a downpayment. In terms of the loan, your monthly payment is based on the purchase price of the car. Over the term of the loan, you will make monthly payments until it is paid off. Once the loan is paid off, you own the vehicle free and clear. You have the option to hold onto the vehicle and drive it with no mileage limitations, make any modifications to the vehicle, or sell it because it is your asset that holds value.

Alternatively, if you only plan to keep the vehicle for a short period of time, leasing can be a more cost-effective option. At the end of the contract, you are required to return the car to the lease company. There is no worry about trade-in allowance, loan payoffs, or down payments. Unlike purchasing a vehicle, a typical lease limits your mileage to 12,000 or 15,000 miles per year. Some leases allow you to purchase more mileage at the time of contracting, but if not, you are required to pay aper-mile fee for each mile over the contract limit. In some cases, paying excess mileage fees may still be less expensive than purchasing a vehicle. Conversely, if you know that you will be driving fewer miles than what the lease allows, you may be better off buying the car. It is important to note that the leased vehicle is not your asset at the end of the contract. Its value does not add to your net worth since you do not own it.

Buying and leasing vehicles both come with added insurance expenses. When you purchase a car, you are required to insure it up to the minimum amounts required by state law. However, when you lease a car, you may be required to carry more insurance than what the state requires. These additional expenses should be added to the calculations when comparing whether to buy or lease. I believe buying is a longer-term investment and leasing is used for more short-term auto goals. Working with a financial advisor to understand your options can help you make an informed decision before you go car shopping.