Should You Lease Or Buy A Car?
Cars don’t last forever; at some point, you’re going to turn the key (or push the button) in your beloved vehicle one last time.
Which means that you’ll need to replace your current vehicle with something else.
There are debates and opinions about everything related to car purchasing:
- New vs. used
- Which brand is best
- Reliable and efficient vs. fast and fun
- SUV vs. sedan
- Buying domestic vs. buying foreign
But one of the most fiercely-debated questions is whether you should buy your next car or just lease it.
People on both sides will simplify everything down and show you why the *other* decision is much worse than the decision they argue in favor of.
The truth is that it’s more nuanced than “leasing a car is a huge waste of your money” or “buying the car will just slam you with depreciation, lease it instead”.
So should you buy your next car, or should you lease it?
After reading this, you’ll know everything you need to know to make an educated decision:
- How car leasing works
- Why you should lease vs. buy and vice-versa
- Best times to lease and best times to buy
- How to nab the best lease deal on a car
- Buying out your lease
First, what exactly is car leasing and how does it work?
How Does Car Leasing Work?
When you’re looking for a place to live, you generally have 2 options:
- Rent (apartment, house, townhouse, etc.)
- Buy (usually just a house)
Buying a car is just like buying a house; down payment, mortgage, monthly payments, and increased equity in the property with each payment.
And if buying a car is like buying a house (albeit usually less complicated), then leasing a car must also be like renting an apartment, right?
Well, pretty much!
After all, you are “leasing” your apartment from your landlord.
Leasing a car is not that complicated.
Looking for a lease is just the same as looking for a car to buy:
- Decide what type of vehicle you want or need
- Research different brands (and within those brands, different models) within your budget to see if they have the features you need
- Comparing deals between makes, models, and even dealerships
- Picking your vehicle
- Understanding the terms of your lease, including mileage limitations (more on that in a second)
When you’re ready to lease, you first put down a down payment as if you were buying the car; the only difference is this down payment is much smaller than the recommended 20% down on buying a car.
However, the more you put down, the lower your monthly payment is. The dealership usually gives you a few fixed down payment options.
Then, you make fixed monthly payments for the duration of your lease. Car leases usually run about 24 months (2 years), but some people get long-term leases (generally anything longer than 24 months).
At the end of the lease, you usually return your car to the dealership. Sometimes, the dealer will offer to sell the vehicle to you at a favorable price as they have to sell the car eventually to minimize losses on a used vehicle.
Benefits Of Leasing A Car
Tons of people lease their car as it provides numerous benefits that buying a car lacks.
Here are some reasons you might want to lease your car instead of buying a whole new vehicle.
The Car Is Brand New
Let’s start with the painfully obvious; unless you find a used-car lease (harder to come by), your vehicle is going to be fresh off the assembly line.
First of all, that means your car has 0 wear and tear on anything; from the engine to the brakes to the body, everything is at 100% integrity.
Also, having the latest or near-latest model means your car will have the most up-to-date safety features and other things at it’s price point.
Not to mention the style factor of being in the latest new vehicle (even if it’s a cheap family sedan; even some of those $20,000 commuter cars are starting to look pretty flashy).
You Indirectly Expand Your Budget
Since you aren’t buying the car, you aren’t paying full price.
That BMW that used to be outside of your price range is suddenly starting to look more affordable.
And when you’re on the road, no one will be able to tell your flashy car isn’t actually your own!
Selling The Thing Isn’t Your Problem
Selling a car is a huge hassle even for those who know their way around automobiles. It can take you many days, a bunch of strangers visiting your house (or a long dealership visit), and plenty of negotiation before you recoup some money from your car.
With a lease, that’s all the dealerships problem. All you have to do is deliver an unwrecked vehicle to your dealership at the end of your lease and think about your next car.
Downsides Of Leasing A Car
Leasing a car is not without it’s drawbacks.
Too Much Leasing Means Too Much Paying
It’s great that you get to trade in your slightly used lease for a brand new car every 2 years. You’re always in the latest and greatest of whatever you choose to drive!
But leasing indefinitely means paying indefinitely; there’s no fixed amount of car loan to pay off before your done.
From a long-term standpoint (think 6+ years), it makes more sense to buy a car and drive it into the ground.
It’s Not Your’s…
Let’s go back to the monthly payment thing.
Each monthly lease payment does nothing but allow you to drive the vehicle.
On the other hand, buying a car means it will be your’s eventually. The down payment on a bought car is your starting equity in the vehicle. Once you’ve paid off the car loan, it’s all your’s.
That means you’ll start saving hundreds of month and have a new asset.
Of course, most cars drop in value faster than houses did about 11 years ago, so your car won’t be worth much.
But at least it’s worth something for a trade-in!
Again, it’s like renting; lease payments simply allow you to retain the privilege to drive the vehicle, whereas car loan payments give you more ownership of the vehicle.
But You’re Still Responsible For It’s Condition
This is completely fair, as you are the one using the vehicle.
But failing to take great care of your lease could cost you a lot upon turning it in and the end of your 2 years with the car.
For one, dealerships want the car in great condition so they can resell it to someone else. If they find excess damage or defacement to the interior or exterior, you’ll be hit with wear-and-tear fees.
Some wear and tear is to be expected with any car, but the dealership will make you fork over extra cash if they think said wear and tear is excessive given the time leased/miles driven.
In addition, you need to return the car in the same condition as it left the showroom. That means you can’t make any crazy engine modifications or trick out the interior or you could be on the hook for even more money.
If you buy a car, you technically don’t need to worry about any of these.
Of course, trashing your car will make it hard or impossible to sell the thing at all, let alone at a decent price.
But if you aren’t worried about recouping some of the investment in your bought car, then you can do whatever you want with it (barring breaking the law).
Leases are a great choice if your driving habits are very predictable, such as if you have a fixed commute to work and little driving outside of that.
That’s because leases come with mileage limits in order to prevent the car from aging too fast.
Most lease contracts offer options for 10,000, 12,000, and 15,000 miles per year; each increase in mileage means a higher monthly payment.
To illustrate how many miles you’re getting, let’s say you opt for the highest mileage limit of 15,000 per year.
At a day-to-day level, that’s about 41 miles a day if you drive that much 7 days a week.
Most commutes are less than that round-trip, so 15,000 should be relatively comfortable.
But you have to pay a premium to get 15,000.
Many people opt for 12,000 miles, which is 1,000 month. That’s only 31 miles a day, every day.
Ok, but what happens if you break that limit?
It’s not good.
For every single mile over your limit, you could be charged anywhere from $0.10 to $0.50 per mile.
Going 1,000 miles over your limit could therefore cost you an additional $100-$500!
If your commutes involves driving to a different city, you might not want to lease a vehicle unless you want to throw tons of money down the drain.
When Do You Lease, and When Do You Buy?
Every market works in cycles: at some time, prices will be at their peak. Other times, prices will hit rock bottom.
To get the best bang for your buck, make sure you know when leasing and buying prices are lowest for cars.
Best Time To Lease
The most budget-friendly time to lease a car is not immediately after it begins leasing, but a short time period after it becomes available.
Two words: residual value.
Residual value is the estimated value of a leased car once the lease is up.
In other words, it’s what the company predicts will be left of the car’s value after depreciation takes it’s share.
Dealerships use the residual value to figure out your monthly payment.
See, dealerships do their best to make you pay for the “amount” of car you use during your lease.
If your leased car is normally worth $25,000 and they estimate that the car will be worth $15,000 at the end of the lease, you’re “using” $10,000 of car. For a 2 year lease, that means they’ll charge you $416.67 per month assuming no down payment.
Shortly after a car begins leasing is when the residual value is the highest.
Leasing at this time will minimize the difference between the value of the car and it’s estimated residual value, therefore minimizing your monthly payment.
Best Time To Buy
If you’re buying a brand new vehicle, hold off until next year’s model is on the way to the dealerships. The dealerships will want to make room for the new and improved inventory, so they’ll cut prices to liquidate their inventory.
For example, don’t get the 2019 Honda Accord until the 2020 Honda Accord is on the way.
Just do some internet browsing to see when new vehicles are on the way; you can also tell they’re on the way when prices suddenly drop on current inventory.
Usually, the newest models are announced between July and October. Keep an eye out for decreasing prices during this time.
Here’s How To Get A Good Lease Deal
Car dealerships are notorious for trying to charge you way more than what you should be paying.
But there are some steps you can take to get the best deal on your leased vehicle.
Research And Shop Around
Rates vary widely between dealerships, so don’t feel like you’re tied down to your local dealer.
If you go online and Google search “*MAKE* lease deals” you’ll be presented with all kinds of monthly lease specials.
On top of that, you can find out what dealers might charge you by “building” your car on their website.
By doing this, you could find rebates and other cost-cutting features with a bit of extra effort.
The other thing you need to research is lease terminology.
There’s a lot of weird car lease jargon that can be quite confusing and costly if you fail to understand all of it.
Know What Car You Want
“I’m not sure what I want” is music to car salemen’s ears. The less you know going in, the more likely your lack of knowledge will be taken advantage of.
It’s not enough to know what kind of car you want (SUV, sedan, coupe, etc.), but you want to know the make and model.
Bonus points for knowing which trim level you want, too.
Knowing this information saves you time at the dealership and prevents salesmen from distracting you with other “shiny objects” in order to make more money off you.
Just because you’re given a certain price on a lease doesn’t mean you have to “take it or leave it”.
Believe it or not, you can negotiate a ton of things involved in your lease.
First and foremost, negotiate down the price. If you’ve done your research, this part will go swimmingly and you should be able to trim your lease payment.
If you’re trading in a car to take a chunk out of your lease payment, you can negotiate you trade-in value as well.
See, dealerships want to pay you dirt for your old car (partially for a good reason, but also out of self-interest) while trying to nickel and dime you on everything else.
Don’t let them underpay you for your car! It’s fair to want more for your money; after all, that’s what the dealership is doing.
Yet another negotiable aspect of your lease is the mileage limit.
Although the dealership might have fixed options for mileage limits, there’s no reason you can’t ask for a lower price for your mileage limit.
And if you’re especially cost-conscious, you can try to negotiate the excess mileage charges too. A $0.01 per mile difference could save you hundreds if you exceed your mileage cap.
Dealerships are primarily concerned with getting your business and only slightly less concerned with milking your wallet. Because of this, you can negotiate almost anything with a dollar amount attached to it.
Unfortunately, you can’t negotiate
- Residual value
- Acquisition fee
- Purchase option/disposition fees
Focus on talking down the other costs.
- Don’t say you’re new to leasing/buying/owning a car – As soon as the car salesman hears you say this, they start grinning an evil grin. Why? Because they assume you have no clue what you’re doing and by extension can get away with charging you more.
- Know your needs – In addition to knowing what kind of car you want, you should have an idea of how much driving you do. Sure, you can play it safe and get the highest mileage limit. However, if you do some quick math beforehand, you can estimate the amount of miles you’ll drive and be better able to pick the mileage limit that’s right for you.
- Gap insurance – Most companies make you get gap insurance to cover the value of your leased vehicle. They’ll press you to get it then and there at the dealership, but you are by no means required to get it from them. Just like with other types of insurance, shop around with banks and insurance providers to find the best rate.
Lastly, About Buying Your Leased Vehicle
After driving the same car for a long time, you might grow to become attached to it.
If only you didn’t have to turn it in at the end of your lease…
Luckily for you, you can buy your leased car at any time during your lease!
But aside from falling love with your vehicle, what other reasons would you want to buy out your lease?
While you leased the car, it depreciated. Technically, that means you’ve already paid the depreciation on your car.
It most cases, it would make less financial sense to keep leasing and paying monthly payments indefinitely.
Less Headache Than Buying Something Else
There are two reasons that buying your leased vehicle reduces the headache that accompanies car shopping.
First of all, you don’t need to spend hours looking around for a replacement for your lease. The car is there, all you have to do is sign some paperwork and hand over the money.
Also, you’ve been with the vehicle for a few years already so you know it’s history. There won’t be as many surprises down the line.
No Carfax necessary.
We’ve talked a lot about your lease’s residual value and how it’s used to determine your monthly payment amount.
However, it also could be the determining factor when you’re deciding on buying your lease of getting something else.
The dealership will try it’s best to guess what you leased car will be worth in 2 years, but they’ll rarely be spot on.
If they set the residual value too low, then the market value of the vehicle will be higher.
In other words, you can get a “slightly used” car that you’re familiar with for a better price than one you’re unfamiliar with.
All without the aforementioned headache of car shopping.
Oh, we should also mention that this favorable pricing makes it very easy to profit off your lease as if you owned it the whole time.
If the residual value is below the market value, that means you can buy the car at a discount, sell it for the higher market price, and bank the difference. Pretty cool!
So there are some great benefits to buying your lease, but are there any reasons to ditch the lease for something else instead?
Lease Purchase Option Fees
Nickeling and diming strikes again in the form of Lease Purchase Option Fees. Yes, your dealership will charge you a few hundred extra just to turn your leased vehicle into simply your vehicle.
This shouldn’t swing your decision, but it’s another cost to consider when thinking about buying your leased car.
You Could Get A Bad Deal
Just like dealerships can underestimate the car’s residual value in a couple years, they can also overshoot on their estimates.
In this case, buying the car would put you at a loss since you’re being charged more for it than what you get if you bought it.
Even if you like the car and want to avoid car shopping, you’ll simply be losing money you could save by buying the car somewhere else.
If the difference between the residual value and the market value is too large, you should just drop off your lease and buy the same vehicle somewhere else.
Little To No Room For Negotiation
Dealerships aren’t too keen on negotiating the buyout price on your lease.
Why, you ask?
Well, you’re already getting the car at a discount if the residual value was set too low.
But even if the residual value ends up being higher than the market value of the car, dealerships usually still won’t budge much.
Sometimes, the dealership will lower the price a bit to speed up the time it takes to sell the vehicle if you do enough homework. Still, that doesn’t mean you’ll get an amazing deal.
After all, the dealership can turn around and sell that car to someone else.
However, if you leased from a bank/credit union, your chances are slightly better.
Leasing Isn’t So Bad, But Keep Your Options Open
Leasing a car vs. buying a car isn’t always a black and white decision; there’s a lot of grey area based on your lifestyle and driving habits.
A car lease might be the better decision if you have a predictable driving schedule and your commute isn’t longer than about 40 miles both ways.
Plus, it makes higher-end cars a bit more affordable.
But if you’re behind the wheel a lot, leasing a car could make less financial sense than simply buying a car.
Especially if you want to fully own your car some day, whether that be to pray for value appreciation and to sell it in the future or just because you want a vehicle without paying hundreds a month just to use it (we aren’t talking gas or insurance, but car payments).
Of course, you can get the best of both worlds by buying your lease during or at the end of your lease term if conditions are favorable.
Whether you’re leasing or buying your next vehicle, one thing remains constant: always do your research and cast a wide net.
You aren’t stuck with the first choice you see, so browse around for the best deals on both car leases and cars for sale.
Make sure you know exactly what you want and don’t be afraid to be slightly aggressive in your negotiations so you can get the best possible price.
And if you can’t get the optimal deal on your lease or purchase, you can always try another place that’s more open to negotiation.