Getting a car is one of the biggest financial decisions you’ll make, and it’s one that can affect your cash flow for years. Beyond the cost of the car, you’ll have to pay for maintenance, fuel, insurance, and parking. A car can cost you just over $700 per month on average, according to AAA (and that doesn’t include depreciation).
When it comes to the buying vs. leasing debate, I lean towards buying, but there are a few situations where leasing might be the better choice for you.
Two things you should avoid: Getting a car that’s more than what you can afford, or getting a car that in no way suits your lifestyle. Car seats don’t fit in sports cars, so be realistic about your day-to-day transportation needs!
The Pros and Cons of Buying
Pros:
Over the long term, car ownership generally will end up costing you less than leasing. If you eventually want to own a car outright and take monthly car payments out of your budget, buying is right for you.
So long as your monthly payments exceed the actual value of the car, you’re building equity that you can use to apply to a down payment on your next car whenever you’re ready to trade in your old one.
Fun Fact: I drove a 1997 Toyota Corolla from age 16 to 29. The reason I was able to travel in my 20s is because I put $200 into a vacation savings account every month since I didn’t have a car payment.
Cons:
When you buy a car, you’ll likely need to have a few thousand dollars on hand for a down payment (or more than that if you buy the car outright). Monthly payments are usually higher as well. Until you fully own the car, you’ll need to be able to afford those higher payments.
You’re also on the hook for all maintenance and repair costs, and the older the car, the more extensive the repairs. You might fully own a car, but still spend a few thousand a year on repairs.
If you’re counting on your car’s value to offset the cost of buying your next car, you might be in for a shock. Cars don’t necessarily retain their value very well, and it can depend on factors beyond your control (like the current market for cars, or how often new models of your car come out). If you’re expecting $5,000 for your trade-in and only get $2,000, that extra $3,000 needs to come from somewhere.
The Pros and Cons of Leasing
Pros:
Leasing a car involves a lower (or no) down payment, and lower monthly payments than buying. Leasing terms usually include the costs most of the maintenance you’d need, which means you won’t have any unpredictable expenses. A predictable monthly payment can be really helpful in keeping your budgeting simple, and if dealing with car repairs isn’t your thing, knowing they’re covered can bring you a lot of peace of mind.
Also, if you prefer to drive newer cars with fewer maintenance issues and more up-to-date safety features, leasing cars will mean your car is never more than three years old.
A lot of people find leasing a car to be wasteful, but it’s something that suits a lot of people’s lives, especially if you receive a car allowance from work.
Cons:
Leasing a car comes with mileage restrictions (around 10,000-12,000 miles per year), so if you have a very long commute or take a lot of road trips, buying a car will save you from paying additional fees for going over the limit.
You also need to return the car in good condition, which might be tough depending on where you drive and park your car (the risk to your bumpers when you park on a city street are real!).
And really read the terms of your lease closely — returning the car might involve extra fees if you’re not careful. Open-end leases require you to pay for the depreciation of the car if you return it in a condition that makes it worth less than its market value (in exchange, this type of lease usually doesn’t have mileage limits). The more common closed-end lease imposes mileage limits, but you won’t be on the hook for depreciation costs.
Finally, you have no equity in a leased car, so you can’t use that equity to apply toward the cost of a new car.
Figuring Out What’s Right For You
Deciding whether to lease or buy a car is a lot like deciding whether to buy or rent a home. While both options have positives and negatives, ultimately it’s up to you to decide what best suits your life and driving habits today and for the next few years.
If you currently have a lease that you’re trying to get out of, you might want to check out Swap-a-Lease. This is also a good website for people looking for a good deal on taking over lease payments from someone else.
You might ask yourself if you can forgo a car entirely. Don’t think that’s possible? Stay tuned for future blog posts on this topic.
