Buying vs Leasing
Paying cash or taking out a car loan isn’t the only way to get into a new car. Leasing was once reserved for corporate customers and luxury car buyers, but now it’s found in every segment of the car industry, from college grads leasing subcompacts to families leasing full-size SUVs. As vehicle prices continue to climb, so does the number of people who lease. Leasing now accounts for nearly one-third of vehicle sales.
While many people take out a car loan to finance a car, leasing offers another way to have a new car in your driveway. Leasing can allow buyers to acquire a more expensive vehicle than they might otherwise be able to afford. However, it isn’t without its drawbacks. Depending on your financial situation and how you use your car, buying could be the better choice in the long run.
At Victory Honda of Morgan Hill, we’ll help you take a closer look at the pros and cons of leasing and buying in the following sections. If you’re curious about what kind of deals you can get with leasing vs. buying, check out our lease specials and finance special pages.
Benefits of Leasing a Car
Leasing a car is similar to financing in many ways, but there are some key differences. When you are purchasing a car, the loan value is based on the entire cost of the vehicle, minus your down payment and trade-in value. When leasing, however, you’re only financing the depreciation that occurs during the lease term (most commonly three years), plus fees. At the end of the lease term, you simply return the car to the dealership.
Unless you pay a tremendous amount of money down, or your trade-in had a high value, a monthly lease payment will be lower than a monthly loan payment. With the car lease, you are only paying the difference between the car’s price and what it’s expected to be worth at the end of the lease, which is known as the residual value.
It’s helpful to look at some numbers. Say your dream car costs $20,000, you have 10 percent down ($2,000), and you don’t have a trade-in. You’ll need to finance $18,000.
With any lease, there will be a predetermined residual value. Let’s say for example that it’s 50 percent, or $10,000. That means you’ll only make payments on the $8,000 worth of use that you’re expected to get from the vehicle. That’s half the price of the outright purchase. It’s not quite that simple – both types of deals usually come with fees that need to be included – but that helps you understand why lease payments are usually lower than financing payments.
If you only have a small down payment saved up, leasing may be a good option. Car leases require anywhere from zero to several thousand dollars upfront. Many of the best new car deals are advertised lease offers that promise low monthly payments, although some require high down payments. Just like with an outright purchase, the more money you put down, the lower the monthly payment.
Leases are a good way to have a predictable total cost of ownership. Many leases last about three years, or the length of a typical new-car bumper-to-bumper warranty. That means the car is usually covered under warranty for unexpected repairs during the lease. You’ll still need to maintain the car though, including oil changes, tire rotations, and recommended maintenance from the manufacturer. Maintenance is even more important for a leased car than a purchased one, as failure to properly maintain and document service for the car during the lease can result in fees at its termination.
If you enjoy having the newest high-tech and safety features, leasing could also be the better choice for you. With leasing, you can get a new car every few years, and each one will have the latest and greatest technology and safety features. With a leased car, you don’t have to worry about selling the car or getting a good price for your trade-in. When the lease is up and you have followed all the rules about mileage and maintenance, you can simply turn in the car and walk away.
Drawbacks of Leasing a Car
Lease contracts strictly limit the number of miles you can drive before steep penalties are imposed. The mileage restrictions typically range from 9,000 to 15,000 miles a year, with 12,000 being the most common. You’ll need to estimate how many miles you drive per year and round up to the next mileage limit available on the lease. If you exceed the limit, be ready to pay a fee per mile at the end of the lease.
Mileage overage fees can add up quickly. Let’s say your lease contract imposes a $0.20 per mile fee for miles over the maximum, you’ll need to pay $1.00 for that 5 mile trip to the store. You can imagine what a cross-country road trip could cost.
The vehicle will also need to be returned in original condition, with less normal wear and tear. If you make alterations to the car that can be easily removed you’re OK, but if you make significant changes, you’ll need to pay to have the car returned to its original condition. Drivers need to read all the fine print to understand what is ok and what is not and it’s important to note that every lease has different terms and conditions. Don’t assume that because you could do something with your last lease, you can do it on your next one.
Another drawback is that when you lease, you’re really just renting the car for a few years and financing the portion of the car’s life that’s covered by your lease term. At the end of the lease, you will have no equity in the car, and no value to apply as a down payment on your next car. If you like the car and want to buy it, you’ll have to take out a loan, and that loan will incur a higher interest rate since you will be financing a used car.
It’s also often only shoppers with good credit scores can qualify for a car lease. If your credit score is less than perfect, you may want to consider waiting to lease until you can increase your credit score, or looking for a certified used car with a similar payment. Buyers with challenged credit can sometimes lease vehicles or acquire someone else’s lease, but it can be more difficult than purchasing a new or used vehicle.
Leasing customers need to make themselves familiar with all of the fees involved across the entire duration of the lease, from inception to conclusion. In many cases, the end of the lease is not as easy or cheap as simply dropping off the keys and walking away.
Benefits of Buying a Car
If you tend to keep your vehicle for a long time, buying is probably a better option for you than leasing. When you buy, you own the car outright when the loan is paid off. Throughout the length of the loan, you gain equity in the car as long as your payments outpace the depreciation of the vehicle.
At the end of the loan, the car belongs to you, and your lender will transfer its title to you. Other than the basic costs of ownership – gas, insurance, repairs, etc. – you won’t have to figure any car payments into your budget.
Another huge benefit is the lack of a mileage restriction. If you live in a rural area or have a significant commute, this can be a huge advantage for buying over leasing.
Drawbacks of Buying a Car
When you buy a new car in the traditional way, you’re open to fluctuations in its market value when you decide to sell or trade it in. Though there are some pretty good predictors of future market value for specific models, you can never be sure about how changing market conditions might affect its value.
With leasing, the future value is predicted upfront. If the car is worth less than that amount in the end, it’s not your problem. If you have a car loan and the car is worth less than the loan balance, you have negative equity. This is only a drawback if you plan on selling it or trading it in because you’ll have to come up with the difference between what the car sells for and the remaining loan balance.
Another potential drawback of buying is a sizable down payment. Many lenders require 10 to 20 percent down when taking out a car loan. On a $20,000 vehicle, that’s $2,000 to $4,000, and it can be tough for people to save up that much money, especially if an accident or other unexpected circumstance requires immediate car replacement. Some special loan programs allow buyers with excellent credit to forgo the down payment requirement and finance 100 percent (or more) of the price of a new vehicle.
Another downside of buying is when aiming to get the monthly payments to fit your budget, you may be enticed to extend the length of the loan. Loan lengths are trending upward, with new loan products available that can stretch your payments out eight years or more. You could end up with a car loan that feels more like a home mortgage.
Longer loan terms give more time for interest to compound, and the interest rates tend to be higher due to the riskier nature of long-term loans. You’ll end up paying more in total payments for the car than if you had a shorter loan term. You’ll also be more likely to be underwater on your loan if you have to sell the car while you’re still paying it off.
A larger down payment will help lower your monthly payments on a car purchase, but again, coming up with that much cash can be difficult.
When it comes to buying and leasing, there’s not a one-size-fits-all answer. Consumers need to carefully consider all of the pros, cons, and costs involved and determine which best fits their situation. Look at your budget and be honest about your mileage needs, lifestyle, and credit history before you make the leap.
If you’re wondering what kind of deals you can get with leasing vs. buying, check out our lease specials and finance special pages. You can also save thousands off your next car purchase at Victory Honda of Morgan Hill.
Directions to the Honda Upgrade Dealership Serving Morgan Hill, CA
Victory Honda of Morgan Hill is located at 17100 Laurel Rd Morgan Hill, CA 95037. We are a short drive from anywhere in the Sunnyvale, Watsonville, or Milpitas area. Come into today and we’ll be happy to help you determine the best route to take when financing your next Honda vehicle.