Deciding Whether to Buy or Lease a Car
- Check our security – We’ll get better deals with a high credit score, credit history, and maybe, just maybe, a secure job. Thus, it never hurts to know where we stand before going in.
- Separate emotion – It’s easy to be impulsive and not rational. We see a car, we love it, and we want it. Cars change, lifestyles change, and finances change.
- Research – Dealers often try to prey on our youthful impulsiveness and push leasing as the most affordable option. Do the math and make sure that the chosen option is affordable.
- Online – Resources such as Leaseguide, Edmunds, and Consumer Reports are great for giving us research ammo to use when we walk into the dealership. They won’t know what hit them.
- Visit at the end of the month – Whether leasing or buying, plan to do so at the end of the month, particularly on a rainy day. By the last week of each month, dealers are already trying to reach quotas, so they’ll be a lot more flexible.
My first love took me places I had never been, had a solid rear end, and gave me lovin’ despite being a little temperamental. So maybe at sixteen, my first love was a 1987 Nissan Stanza that never started, was covered in grease stains, and always smelled like exhaust, but what can you do. After three turbulent years
with Co-Stanza (as I christened her), she broke down and I forced myself to make a decision. Should I buy or lease my next relationship—I mean, car? It’s just one more daunting question in our somewhat adult lives. To make it as easy as possible, here is a guide to buying or leasing a car.
Why Should You Buy a New/Used Car
If you are a monogamist, buy a car. Besides the pride of knowing you have exclusive ownership over your vehicle (and thus can pimp it out to your heart's content), buying is often the best long-run financial option. As far as monthly expenses go, buying a new car is the most expensive option (~$600/month assuming a $20k car and a 6% loan), followed by leasing a car ($350 for the same car/loan), and finally buying a used car (~$280/month assuming a $10k purchase price and an 8% loan). But here’s the kicker: at the end of a lease, you can’t sell the car, thus you can’t recoup any money—all the dough spent leasing it goes down the drain. After you’re finished with a new or used car (5-10 years), however, you can resell it to earn a cash back bonus. Theoretically, if you purchased a car and then sold it at the end of your loan period, the total expense may be cheaper than the aggregate of the monthly lease payments on multiple vehicles over the same time period (but we urge you to do the math on this one before assuming it to be true in all cases).
More benefits: unlike leases, there are no mileage restrictions and no penalties if you rack up 100,000 miles from monthly road trips to Vegas. However, since buying a car means owning it for at least five years, you should carefully analyze your financial stability. Only if you have solid job prospects and expect to be able to pay the monthly loan payments should you think about buying. There’s no reason to go into shock just to own.
Bottom Line: You should buy a car if you can afford it, want your car for a long time, drive a lot of miles, and want the flexibility of knowing you own your car and can sell it at anytime. If you do choose to buy, check out our survival guide on buying a car.
Why Should You Lease a Car
If you like to play the field, you should lease. Some people love that new car smell and always want to be driving the latest beauty year after year. At the end of the lease (typically three years), you can just return the car, walk away, and move on to the next little hot rod. No haggling with a suspect used car salesman who wants to trade your Mercedes for a Ford Pinto. That said, leasing is nonetheless still a commitment. If you end a lease early, there are steep termination fees and you lose the security deposit required by most leasing companies.
Monthly lease payments are always lower than loan repayments, according to Al Hearn of Leaseguide.com, and thus make more sense financially over the short term—particularly if you don’t have a lot of disposable income month-to-month. But as noted above, leasing generally costs more in the long run since you don’t have any resale value at trade-in time. Also, with a lease, you’re always under warranty. With a new car, you may be covered for the first few years but after that you’re on your sad lonesome.
Bottom Line: Simply put, you should lease if you don’t drive many miles (there are penalties if you exceed the lease mileage), enjoy driving a new car every couple of years, don’t mind not being able to modify or own the car, and can complete the lease as scheduled.
The Money Question
To afford a new car, most people have to take out a loan. This sample pricing scenario shows a car valued at $20,000 with monthly loan payments of $608 where the same $20,000 car would be leased at only $350 a month. Yet, by buying a car, you have something to sell when you’re done with it, thus recouping a large chunk of change...okay, I think you've got the idea at this point.
The most affordable option? The classic used car that has cheaper monthly payments than both (that is, if you even need a loan). At only a couple thousand dollars for many used cars, you may be able to pay up front and not accrue that dreaded interest on monthly payments. Of course, the risk is that you'll end up pouring so much money into maintenance and upgrades that you might as well have gone with a new car.
Sweet Deals for Recent Grads
In the hopes of buying your brand loyalty, many car companies offer car buying and leasing incentives to recent grads. Translation: they hope to buy your love for their vehicles for the rest of your car-driving lives. All you need to do is to prove your graduate status (depending on how restrictive the program is) from an accredited university and the car companies will offer you rebates, special financing rates, and a delayed first payment. The following companies have their own buying and leasing incentive programs that have us lucky college graduates in mind:
- GM (offers college deals certain times throughout the year)
- Honda and Acura
Check out the Cars for Grads website for help finding the perfect car, the perfect deal, and the perfect opportunity to brag about how much money you saved.
Gaming the system is also a key to getting a good deal on cars. Most car dealerships impose monthly quotas on their salespeople, so if you go in at the end of the month you might find yourself the happy beneficiary of some desperate deal-making. The same goes for any day that will clearly be a slow one for sales on the car lot. Check the forecast for blizzards, hail storms, hurricanes, and tornadoes—the worse the weather, the better your chances of saving money on a car.