Is it time to replace your old car for a newer, more reliable vehicle? If, like most of us, you’re planning to finance your new vehicle, you may be wondering about the benefits of buying versus leasing. Simply put, a lease differs from an auto loan in that with a lease you’re essentially renting a car on a long-term basis of usually three or four years rather than making monthly payments to a lender in order to gain equity in the vehicle. To help you gain perspective on whether buying or leasing may be right for you, we’ve identified some important factors to consider with regards to your lifestyle, budget, goals, and personal preferences.
Good reasons to buy:
1. Your long-term financial well-being is a priority: In most cases, buying a car and keeping it as long as it continues to run is preferable to leasing from an economic standpoint. Since you are building equity in your car with monthly payments, you will eventually own the car outright and can stop making payments. When you continue to drive the car after it has been paid in full, you have cut out a major expense and freed up money which you can then put toward savings or investments. On the other hand, if you decide to lease a car, you will have nothing to show for it once the lease ends; you’ll need to get a new vehicle for transportation or purchase the car at its current value.
2. You don’t want to be restricted in the amount of driving you do: A major disadvantage of leasing is that you have an annual limit on the number of miles you can drive each year without being penalized. Typical car leases have mileage restrictions of 9,000, 12,000 and 15,000 per year. If you exceed this limit, you’ll have to pay overage charges for every additional mile at the time when your lease terminates. The average California driver puts more than 13,000 miles on their car each year. Those of us with long commutes or who tend to take a lot of road trips often drive even more. Make sure you have a reasonable idea of how many miles you drive each year before signing a car lease. If you can’t negotiate a higher mileage limit or reduced penalties for overages, buying is likely the better option for you.
3. You have children or pets who will be riding in the car: When you lease a car, you agree to return the vehicle in excellent condition or be charged for any damage above what the leasing company considers to be normal wear and tear. During the lease return process, an inspector will look for damage in the form of mechanical problems; abnormal and excessive tire wear; cracks in the windshield and windows; cosmetic flaws such as dings, dents, scratches and scrapes, upholstery tears or stains; and more. For many people, especially those with young children or pets, maintaining a car in mint condition may not be realistic. In addition, you’re also restricted from making any major alterations to the car when you lease it.
You don’t have stellar credit: In general, dealers will only lease a car to someone with good credit since a lease is normally considered to be a higher risk than an auto loan. If you have average or poor credit but can demonstrate that you meet at least minimal income requirements, you will usually qualify for a car loan. However, a person without good credit will commonly receive less favorable interest rates than someone deemed more creditworthy, so taking steps to improve your credit rating before you buy a car can pay off in terms of lowering your monthly car payments and the total price you pay for your car.
Potential reasons to consider leasing:
1. You may be able to drive a more expensive car than you can afford to buy: The monthly payments that you make on a car that you lease tend to be lower than what you would pay each month to buy the same vehicle. Whereas a car loan is based on the entire price of a car, a lease is based on the difference between the car’s price and what its projected value will be at the end of the lease (called its residual value). Because you are only paying for a percentage of the car’s price in a lease agreement, you can usually afford to lease a higher quality car than you could afford to buy. However, being able to lease a more expensive car than you can buy doesn’t mean that it’s in your best financial interest to do so.
2. You like to drive a new car every few years: If you insist on driving a brand new car every three years or so, leasing is an option that may make sense for you. Because almost all cars are depreciating assets, most people will owe more money on their loan than the car is worth after only a few years of having purchased it. This means that if you want to buy a new, similarly priced or higher-priced model every few years, you’ll have to make up the difference between your loan and what you receive for selling or trading in your car. In this case, it may be preferable to lease a car rather than having to negotiate on a new car along with the sale or trade in of your current car every few years.
3. You’re using your car for specific business purposes: It may be worthwhile to look into leasing a vehicle if you plan to transport clients or business associates because leasing allows you to drive a higher end vehicle for less money per month. Also, you may also be able to deduct a portion of the costs of leasing a car from your taxes as a business owner. However, keep in mind that the IRS has specific restrictions in regards to how you may use your car lease as a tax deduction, so it’s a good idea to check with a tax professional to find out what, if any, tax benefits are available to you if you lease your vehicle.
Think you have a good handle on the pros and cons of buying versus leasing and leaning towards buying your next vehicle? If finding the time to research the ideal car for you and negotiate a great price has been holding you back, SF Police Credit Union’s Auto Buying Service can be a terrific solution! Free to SFPCU members, this service acts as your personal concierge throughout the entire buying process. You’ll be assigned a personal auto shopper who’ll find the vehicle you want based on your specifications at the lowest price possible—regardless of whether you want to buy a new or pre-owned vehicle. For details, visit us at https://www.sfpcu.org/autobuyingservice.