There are many options available for a buyer to get behind the wheel of a new car. In fact, you no longer even have to be a "buyer" in the traditional sense of the word. If you prefer, vehicle leasing is available. It's great to have a choice, but the trouble is that some people are unaware of the differences between the two approaches. A car shopper may find themselves wrongly drawn to one when the other would serve them better.
Let's look at the differences between leasing and buying a car and the pros and cons of each. You'll quickly see that both have their good and bad points, but the best option depends on your own situation as a customer.
Lease Vs. Buy a Car: What's the Difference?
A lease is a form of car financing that involves a monthly payment but without ownership privileges (unless the vehicle is purchased at the end of the lease). Think of a car lease as a long-term rental with specific conditions. A lease requires the lessee (the one who leases the car) to keep the vehicle in good repair, limit mileage to an agreed-upon amount, and return the vehicle at the end of the contract (usually 36 or 48 months).
Most leases begin at the dealership. The customer pays a nominal down payment and agrees to the terms. Most cars are leased for 12,000 miles per year, but leasing companies offer higher or lower mileage allowances. Once all the particulars are decided (and credit is approved), a contract is signed, and the lessee commits to a monthly payment for the next few years.
Most new car leases last 36 months, but it's not uncommon to come across a lease for longer or shorter terms (for example, 48 months or 24 months). Some dealers will lease pre-owned vehicles, which are often lease returns.
When the lease period is up, the leasing company (like Toyota Financial Services ) will ask the lessee to choose from one of these options:
- Return the car and sign a lease on a new vehicle
- Return the car and don't sign a new lease
- Pay a final balloon payment and own the car outright (the amount represents the remainder of the car's market value left unpaid once the lease is over)
Buying a car is arguably the more "traditional" approach when it comes to shopping for a new car. It can be done in two main ways, either by paying cash in full for the vehicle or through an auto loan.
Most buyers finance new cars, though they may buy pre-owned cars outright, depending on the price. The interest rate on new car financing is usually better than with used vehicles. For qualified buyers, some automakers offer low- or no-interest loans.
In many ways, an auto loan shares some similarities with a car lease (at least initially). A buyer (with a loan) makes a down payment (10 to 20 percent is common), signs the paperwork, and drives off with the vehicle. But while the purchaser takes possession of the car, ownership isn't transferred until the loan is paid off.
Most car loans last 48 or 60 months, but with the rise in car prices come longer loans; 72 and even 84 months are nothing unusual these days. At the end of the loan, assuming all the payments have been made, the borrower will receive the title and own the car outright.
Benefits of Leasing a Car
Leasing offers greater flexibility thanks to the numerous options available at the end of the lease. In addition, the lease payment can be lowered by reducing the mileage allowance or increasing the down payment. But, there are inflexible elements, too, such as the inability to cancel the agreement before the term is up.
2. More Car Choices
A lower monthly lease payment means you can afford more car. So, for example, the loan payment on a base Jeep Grand Cherokee could get you a loaded Grand Cherokee lease for the same amount.
3. Always Have the Latest Thing
Leasing allows you to have the latest vehicle in the driveway. At the end of each term, pick another car to lease and enjoy the latest features like advanced safety technology. With luck, you can trade in the old lease to lower your costs.
4. Lower Monthly Payments and Down Payment
Leasing invariably means a smaller deposit and a lower monthly payment. This is because you are only paying for the car's depreciation and not its entire value. If you purchase the vehicle at the end of the lease, the result is relatively similar to a purchase.
5. No Need to Deal with Reselling
Just return the car to the dealership and walk away when the lease is up. If the vehicle is in condition (and mileage is within the allowance), there are likely minimal fees (if any, at all) and paperwork. There's no advertising the car, handling DMV forms, or resell efforts.
6. Cheaper Maintenance
Since most leased cars are brand-new, the required maintenance is minimal. Beyond oil changes and tire rotations, you can expect no major maintenance expenses. And with most cars being leased for three years, the manufacturer's warranty applies.
Benefits of Buying a Car
1. You Own the Car at the End
Each monthly payment you make on a car loan pays for more equity in the car. It's not an appreciating asset, but at least the funds count towards owning something outright. Driving a leased car means being behind the wheel of someone else's property.
2. No Mileage Limits
Even though a purchased and financed car is owned by the loan company, it can be driven as much as you want. There are no mileage limits or penalty fees to worry about.
3. No Dealing with Return Inspections
Most leasing companies require an end-of-term inspection. It can be a stressful and expensive encounter if the car has excessive wear or higher-than-allowed mileage. There's no such requirement with a conventional car loan.
4. Can Sell the Car Anytime and Pay Off Balance
Unlike getting out of a car lease, you can sell a financed car at any point and simply pay off the remaining balance. You should keep the finance company informed since they are technically the legal owners. Selling a car with a loan is still possible but requires a few extra steps.
5. Less Complex Agreement with Dealership
Car leases can be very complex and full of tricky conditions, especially when it comes to penalties for premature cancellation of a lease. On the other hand, car loans are more straightforward with easy-to-understand details.
Verdict: Lease Vs. Buy a Car: Which is Better?
Numerically, it can appear that leasing is a better option, but the truth is neither option is objectively better for all or even most drivers. Leasing is ideal for customers who need a car for a relatively short term and want to drive the latest thing.
On the other hand, owners who keep a car for the long term are better off with a purchase. There are fewer restrictions than with a lease, and costs (in the long run) are less. If there's uncertainty about your situation over the next three years, it's easier to get out of a car loan than a lease.
In the end, a buyer has to weigh their options, consider all the pros and cons, and decide based on individual circumstances.