Last updated Mar. 12, 2023 by Peter Jakes
Cars are considered the second largest purchase made after a home. It’s a top necessity in every home for easy mobility on a daily basis. However, there are two main options to consider when it comes to owning a car; buying or leasing it.
With these two options comes the question everyone is asking, is it cheaper to buy a new car or lease a car? Which of the options is better?
There are many reasons why buying a car seems like a suitable investment. Yet, leasing a car, according to our finance experts, is a better financial decision. It is also the cheapest option.
In this article, we will answer the question “to buy or lease a car, which is cheaper”. You will also learn everything you need to know about buying and leasing a car.
Which is Cheaper for me: Buying a Car or Leasing it?
Some experts say buying a car is cheaper because you own it for as long as possible. Buying a car involves a higher cost with or without monthly payments, depending on if you are buying with cash or a loan.
Buying a car with a loan helps you build equity. You will also have the car all to yourself at the end of the loan term. Car dealers are of the view that Leasing a car is much cheaper than outrightly buying it.
Leasing, on the other hand, entails renting a car for a given period with no equity built. You make a monthly payment but have no ownership claims on it once the lease terminates.
At the end of this article, you will have a definite answer on which of the options is cheaper for you.
What Does It Mean to Buy a Car?
When asking yourself the question, “should I buy a car?” It is essential first to understand what exactly buying a car is and its advantages. Below are the basic facts that come with buying a car.
Unlike in a lease, buying a car means you own the car. You can keep and use it as long as you want.
When you buy a car with a mortgage or car loan, your monthly payments are higher. This calculation is because you’re not only paying the purchase price but also interest, taxes, and other finance charges.
The upfront price is the initial down payment during a car purchase. This payment usually includes taxes, registration, and other fees.
You need not worry about wear and tear when buying a car. However, wear and tear due to usage lower the car trade-in or resale value. This wear and tear are why leasing is better than buying a car.
Generally, the lower the mileage and the better the car’s condition, the higher its value. When you buy a car, you’re free to drive as many miles as you want. You’ll also bear in mind that higher mileage also lowers the car’s trade-in or resale value.
If you have an urgent loan to repay, and you bought a car instead of leasing it, you can easily decide to sell your car or trade it in at any time when the need arises. You can use the money from the car sale to pay off any loan balance.
You can decide to change your car by selling or trading-in trading to get another one. Returning it to the dealer does not apply here.
When the car depreciates, its cash value is yours to use as you like.
When you buy a car rather than leasing it, the car is yours to customize as you like.
At the end of a car loan term, you have no further payment to worry about. This is because you have built equity to help pay for your next car without stress.
The trade-in value of a car is how much a dealership believes your vehicle is worth. If you bring your automobile to the dealership, you can utilize the trade-in value to offset the cost of purchasing or leasing a new vehicle.
As car prices rise past $46,000 at the end of 2023 and buyers start to demand the latest safety features that are available only on newer cars, leasing a vehicle has become a mainstream alternative to buying.
The monthly payments for leasing a car are generally lower than that of loan payments for a new car. Lease payment depends on these factors:
The sales price is negotiated with the dealer. This depends on the type of car you want to lease.
The length of a lease is the number of years agreed to the car’s lease. Because the depreciation rate varies during the life of an automobile, the length of your lease will affect your monthly charge. Vehicles depreciate faster in the first few years of ownership and slow down as they age.
This expected mileage is the maximum number of miles you run your car in a year. Most leases come with a 12,000 miles annual allotment. Your monthly payment will be increased when the yearly mileage allotment is higher. If you exceed the mileage limit, you will accrue extra cash for every mile at the end of the lease.
Your car’s residual value is the car’s value at the end of the lease. It is the amount to be paid if you decide to purchase the car as the lease expires.
These are costs added to the car lease, and it affects the monthly cost of your lease.
Also, note that in car leases, some dealers require a downpayment for it—the more the down payment, the lower the lease payment. Down payment may help you to more easily qualify for an auto loan, especially if you have lower credit scores which makes buying a car a cheaper option.
Buying A Car Vs. Leasing a Car
To decide “To Buy or Lease a Car, Which Is Cheaper”, consider the pros and cons involved.
Leasing a car is a more cost-effective option and better than buying a car. This is because monthly payments are usually lower in leasing as you’re not paying back any principal. What you repay in leasing is the difference between the car’s value when it is new and its expected value when the lease terminates. These include the finance charges.
Buying a car alternatively makes you an outright owner of the car, either cash or a car loan. With a car loan, your monthly payment is higher. The calculation is based on the sales price, interest rates, and the number of years it will take to repay the loan. A car loan helps you build your equity to buy a new car.
Buying a car with cash offers its own advantages. Because you’re limited to the money you have on hand, it can help you stick to your budget, and you won’t have to pay interest on an auto loan. However, buying beforehand may disqualify you from dealer special offers and leave you cash-strapped in an emergency.
How Do I Finance a Car?
This question is a crucial question to ask yourself before deciding on “To Buy or Lease a Car, Which Is Cheaper?” Buying a car with a car loan instead of cash is more convenient. That way, you borrow money from any financial institution and make monthly payments for some number of years.
Part-payment is set aside towards paying the interest rate on loan and the rest is used to pay down the principal. The higher the interest rate, the higher the payment. As the principal is paid and the loan serviced, you build equity until the car is all yours by the end of the loan.
Leasing a car started becoming a better alternative as the cost of buying cars increased and buyers started looking for better and cheaper ways of owning a car. With a lease, you make a monthly payment which may not take a toll on your finances.
The payment, most of the time, is less than the monthly cost of financing a new car. However, the car must be returned at the end of the lease term. However, a lease has less flexibility than a purchase, and mileage restrictions are part of it.
Advantages of Leasing a Car
Here exactly is the reason we think leasing is a cheaper and better option than buying a car.
- It gives you the opportunity of driving an expensive and more luxurious car than you can afford.
- You drive the car during its most trouble-free years and save yourself the stress of repair.
- The lease most times includes free oil changes and other scheduled maintenance. For some lease contracts, you enjoy free maintenance for some years.
- You don’t worry about the car’s trade-in value or the stress of resale at the expiration of the lease.
- You have the opportunity of changing cars at a reduced cost. If you are someone that prefers driving new cars, a lease offers you the opportunity.
Disadvantages of Leasing
As attractive as the lease may appear, here are a number of disadvantages.
- Monthly payments may go on forever, especially if you lease one car after another.
- Leasing usually costs more than an equivalent loan in the end because you’re paying for the car when it most likely depreciates.
- Excess wear and tear charges when the car is returned, especially if it wasn’t maintained or in good condition. You are prone to paying extra charges when returning the car at the end of the lease.
- Lease contracts specify a limited number of miles to be covered. If you go beyond the limit, you will pay an excess mileage penalty for every additional mile. On the other hand, there is no credit for unused miles.
- In leasing a car, you incur an excess cost of termination and penalty fees when you want to opt out of the lease before the scheduled time.
- No room for customization. When you lease a car, it is to be returned in its original state when it was leased, with a few exceptions like professional window tinting and the usual wear and tear.
Leasing is very attractive if you are going for lower monthly costs and crave for constant change of new and latest cars.
Here, you worry less over maintenance costs and reselling of the car when the lease term terminates. While buying a car affords you the opportunity of owning the car out rightly, using it as you wish without the pressure of returning it back to the dealer after a period of time.
Experts have proven that leasing a car is cheaper and a better financial decision than buying a car in the long- run. We have been able to answer your questions on “To Buy or Lease a Car, Which Is Cheaper?” however, do more research and look at your finances before making this decision.
Frequently Asked Questions
If one craves a constant change of cars and the latest technology cars, is it better to buy or lease
Should I buy or lease a car when I always crave a constant change of cars or the latest cars?
It is better to lease when you crave new and latest cars constantly. This is because the lease gives you the opportunity of driving a more expensive car than you can normally afford if you want to buy one.
If one desires lesser or zero maintenance for cars, is it advisable to buy or lease?
If I don’t like maintenance cars or constant visits to the car repair shop, should I buy or lease the car?
It is advisable to lease since the lease usually covers the maintenance cost for the period of time.
Does it make sense to buy or lease when I commute for long hours daily? It is best to go for a car lease if you commute for long hours daily. . That way, you’ll get as many miles as possible without any extra charge on the mileage.
When is the best time to lease or buy a car?
It is not advisable to lease or buy the latest car models recently introduced to the market as the costs are usually very high.
Can I buy the car at the end of the lease contract?
Yes, you can decide to buy. The price will be pegged at the car value at the time of lease expiration.