Car insurance buying vs leasing a new car
|How this Guide is Organized|
|1. Benefits of Leasing|
|2. Drawbacks of Leasing|
|3. Benefits of Buying|
|4. Drawbacks of Buying|
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Paying cash or taking out a car loan isn’t the only way to get into a new car. Leasing was once reserved for corporate customers and luxury car buyers, but now it’s found in every segment of the car industry, from college grads leasing subcompacts to families leasing full-size SUVs. As vehicle prices continue to climb, so does the number of people who lease. Leasing now accounts for nearly one-third of vehicle sales.
While many people take out a car loan to finance a car, leasing offers another way to have a new car in your driveway. Leasing can allow buyers to acquire a more expensive vehicle than they might otherwise be able to afford. However, it isn't without its drawbacks. Buying could be the better choice in the long run, depending on your financial situation and how you use your car.
We'll take a closer look at the pros and cons of leasing and buying in the following sections. If you're curious about what kind of deals you can get with leasing vs. buying, check out our lease deals and purchase deals pages. You can also save thousands off your next car purchase using the U.S. News Best Price Program.
Benefits of Leasing a Car
Leasing a car is similar to financing in many ways, but there are some key differences. When you are purchasing a car, the loan value is based on the entire cost of the vehicle, minus your down payment and trade-in value. When leasing, however, you’re only financing the depreciation that occurs during the lease term (most commonly three years), plus fees. At the end of the lease term, you simply return the car to the dealership.
So, unless you pay a tremendous amount of money down, or your trade-in had a high value, a monthly lease payment will be lower than a monthly loan payment. With the car lease, you only pay the difference between the car’s price and what it’s expected to be worth at the end of the lease, which is known as its residual value.
It’s helpful to look at some numbers. Say your dream car is a new SUV that costs $30,000, you’re able to put 10 percent down ($3,000), and don’t have a trade-in. You’ll need to finance $27,000.
With any lease, there will be a predetermined residual value. Let’s say, for our example, that it’s 55 percent, or $16,500. That means you’ll only make payments on the $13,500 worth of use that you’re expected to get from the vehicle. That’s half the price of the outright purchase. It’s not quite that simple – both types of deals generally come with fees that need to be included in the math – but that gives you an idea of why lease payments are generally lower than financing payments.
If you only have a small down payment saved up, leasing may be a good option. Car leases require anywhere from zero to several thousand dollars up front. Many of the best new car deals are advertised lease offers that promise low monthly payments, although some require high down payments. Just like with an outright purchase, the more money you put down, the lower the monthly payment.
Leases are a good way to have a predictable total cost of ownership. Many leases last about three years, or the length of a typical new-car bumper-to-bumper warranty. That means the car is usually covered under warranty for unexpected repairs during the lease. You’ll still need to maintain the car, though, which includes oil changes, tire rotations and recommended maintenance from the manufacturer. Maintenance is even more important for a leased car than a purchased one, as failure to properly maintain and document service for the car during the lease can result in fees at its termination.
If you enjoy having the newest high-tech and safety features, leasing could also be the better choice for you. With leasing, you can get a new car every few years, and each one will have the latest and greatest technology and safety features. With a leased car, you don’t have to worry about selling the car or getting a good price for your trade-in. When the lease is up and you have followed all the rules about mileage and maintenance, you can simply turn in the car and walk away.
Drawbacks of Leasing a Car
Lease contracts strictly limit the number of miles you can drive before steep penalties are imposed. The mileage restrictions typically range from 9,000 to 15,000 miles a year, with 12,000 being the most common. You’ll need to estimate how many miles you drive per year and round up to the next mileage limit available on the lease. If you exceed the limit, prepare to pay a fee per mile at the end of the lease.
Mileage overage fees can add up quickly. For example, if your lease contract imposes a 20-cent-per-mile fee for miles over maximum, you’ll have to pay $1 for that 5-mile round-trip to the grocery store. You can imagine what a cross-country road trip could cost.
Dealers will require that the vehicle be returned in original condition, less normal wear and tear. If you make alterations to the car that can be easily removed, you’re OK, but make significant changes, and you’ll have to pay to have the car returned to its original condition. Lessees need to read all the fine print to understand what is allowable and what is not; it's important to note that every lease has different terms and conditions. Don’t assume that because you could do something with your last lease, you can do it on your next one.
Another drawback is that when you lease, you’re really just renting the car for a few years and financing the portion of the car’s life that's covered by your lease term. At the end of the lease, you will have no equity in the car, and no value to apply as a down payment on your next car. If you like the car and want to buy it, you’ll have to take out a loan, and that loan will incur a higher interest rate, since you will be financing a used car.
It’s often only shoppers with good credit scores that will qualify for a car lease (especially those with manufacturer subsidies). If your credit score is less than perfect, you may want to consider waiting to lease until you can increase your credit score, or looking for a certified used car with a similar payment. Buyers with challenged credit can sometimes lease vehicles or acquire someone else’s lease, but it can be more difficult than purchasing a new or used vehicle.
Leasing customers need to make themselves familiar with all of the fees involved across the entire duration of the lease, from inception to conclusion. In many cases, the end of the lease is not as easy or cheap as simply dropping off the keys and walking away.
Benefits of Buying a Car
If you tend to keep your vehicle for a long time, buying is probably a better option for you than leasing. When you buy, you own the car outright when the loan is paid off (though until then, the lender owns the vehicle). Throughout the length of the loan, you gain equity in the car as long as your payments outpace the depreciation of the vehicle.
At the end of the loan, the car belongs to you, and your lender will transfer its title to you. Other than the basic costs of ownership – gas, insurance, repairs, etc. – you won’t have to figure any car payments into your budget.
Another huge benefit is the lack of a mileage restriction. If you live in a rural area or have a significant commute, this can be a huge advantage for buying over leasing.
Drawbacks of Buying a Car
When you buy a new car in the traditional way, you’re open to fluctuations in its market value when you decide to sell or trade it in. Though there are some pretty good predictors of future market value for specific models, you can never be sure about how changing market conditions might affect its value.
With leasing, the future value is predicted up front. If the car is worth less than that amount at the end, it’s not your problem. If you have a car loan and the car is worth less than the loan balance, you have negative equity (also known as being upside down or underwater). This is only a drawback if you plan on selling it or trading it in, because you’ll have to come up with the difference between what the car sells for and the remaining loan balance. Many dealerships, however, will be more than happy to roll that deficiency balance into the financing for your next vehicle (not a good idea, but that’s a topic for another day).
Another potential drawback of buying is a sizeable down payment. Many lenders require 10 to 20 percent down when taking out a car loan. On a $30,000 vehicle, that’s $3,000 to $6,000, and it can be tough for people to save up that much money, especially if an accident or other unexpected circumstance requires immediate car replacement. Some special loan programs allow buyers with excellent credit to forgo the down payment requirement and finance 100 percent (or more) of the price of a new vehicle.
One other downside of buying is that, in trying get the monthly payments to fit your budget, you may be enticed to extend the length of the loan. Loan lengths are trending upward, with new loan products available that can stretch your payments out eight years or more. You could end up with a car loan that feels more like a mortgage.
Longer loan terms give more time for interest to compound, and the interest rates tend to be higher due to the riskier nature of long-term loans. You’ll end up paying more in total payments for the car than if you had a shorter loan term. You'll also be more likely to be underwater on your loan if you have to sell the car while you're still paying it off.
A larger down payment will help lower your monthly payments on a car purchase, but again, coming up with that much cash can be difficult.
When it comes to buying and leasing, there’s no one-size-fits-all answer. Consumers need to carefully consider all of the pro, cons, and costs involved and determine which best fits their situation. Look at your budget and be honest about your mileage needs, lifestyle, and credit history before you make the leap. For the latest tips and deals, be sure to visit our financing guide.
If you're wondering what kind of deals you can get with leasing vs. buying, check out our lease deals and purchase deals pages. You can also save thousands off your next car purchase using the U.S. News Best Price Program.
- How to Finance a Car and Get a Car Loan
- How to Negotiate the Best Price on a New Car
- How to Buy a Used Car
You’ve probably heard more than once that car leasing is a bad deal. And in many cases, it definitely makes more sense to buy a car outright. But this doesn’t mean leasing a car is a bad move for everyone. Like any issue, there are pros and cons to leasing a car.
Around 20% of all new car transactions are leases, so it’s clear that there are definitely people out there who love the thought of always driving around in a new car.
But what’s the best decision for you? Well, whether or not to lease a car depends on a lot of factors including how much money you have (both up front, as well as for a monthly payment), how much you drive, and how much time you want to spend on your car.
Let’s take a look at the pros and cons of leasing so you can make the best decision for your situation and circumstances.
Pros of Leasing a Car
- New car, all the time. Leasing a car means you always get to drive around in a sweet new ride. For many people, this is an emotional boost that can’t be ignored. If you love cars and driving, this is a big perk.
- Less maintenance issues. Because you’re always driving a newer car, you usually don’t have to deal with the regular maintenance issues that car owners face as their vehicles age. You turn in your car before all those problems start showing up (e.g. bad brakes or shot transmission). If you lead a very busy life, or you’re on the road a lot, this is one less stress you have to deal with.
- Leases are tax deductible for small businesses. If you’re self-employed or you own a business, you can write off your lease as a business expense.
- “Afford” a nicer car. If you’ve ever wondered how it is that so many people can afford to drive BMWs and Range Rovers, then wonder no more. According to LeaseGuide.com, around 75% of all luxury cars are leased. The reason is because banks don’t like to loan out more than $30,000 for a car loan. If you want a car that’s worth more than that and you don’t have the money to make up the difference, leasing is your only option. On the upside, your monthly payment will be lower than if you actually bought a car. Leasing allows you to “afford” a nicer car than you’d get if you had to buy it.
- Few upfront costs. Speaking of costs, leasing allows you to get into a car with very few “upfront” costs. You often don’t need a down payment (or if you do, it’s fairly low), your monthly payments are lower, and your sales tax is going to be a lot lower since you only have to pay tax on the value of the car you actually used. According to Edmunds.com, this means that during the life of your lease, you’re going to pay roughly half the sales tax you would if you bought the car.
Cons of Leasing a Car
- Lease contract amount doesn’t change, even after an accident. If you get into a car accident and the vehicle is totaled, you’ll still be responsible to pay back the full lease contract amount. Even if the insurance company gives you back less than what you owe to the dealership, you’ll be responsible for the full amount. If you do go with a lease, at least be smart enough to buy gap insurance which covers you for that difference that you would owe to the dealership.
- Limits on time and distance. Many times, the lease agreement will be for 5 years/60,000 miles. So, if you go over that 60,000 miles and keep it until the 5 years is up, you’ll pay a penalty for every mile over 60,000. Think about how many miles you put on a car each year. Most people use well over 12,000 per year. Leasing a car means you have to really “budget” your miles, which can add stress and frustration to your life. Of course, you can negotiate your mileage, and you should, but budgeting miles is a major drawback for many people. On the flip side, if you do a good job budgeting your miles, and stay under your yearly allotment, you don’t get any credit for the miles you didn’t put on the car.
- Liability for payments. If you lose a job or experience a heavy time of financial hardship and cannot afford the payment anymore, the dealership will recover the car and sell it on auction. If they sell it for less than you owe for the lease agreement, you will be legally responsible to pay the difference.
- No ownership, but still responsible for repairs. Leasing a car means it’s not yours; any repairs that aren’t covered by the warranty are your responsibility. But when you turn in the car, you don’t benefit from the investment you made into that car. Leasing a car also means that you can’t modify it like you’d be able to if you’d bought it (e.g. adding a custom paint job or spoiler). And if your kids spill paint on the backseat, or your dog nibbles a bit of the upholstery, you’re going to have to pay extra for “wear and tear” when you turn the car in. Not fun.
- Can’t claim vehicle as an asset. Again, you can’t claim the car as an asset. It is technically still an asset of the dealership that leased it to you.
- Steep car payments and opportunity cost. A lease starts a trend of perpetually paying a car payment. If you never paid a car payment and the average car payment in the U.S. was $350 a month, putting that $350 a month in a mutual fund that made 10% would become $791,171 in 30 years.
- More expensive to buy after lease. If you decide to take the option to buy the car at the end of the lease term, you’ll have paid much more than the cost of the car even if you had financed it.
- Stuck in lease after signing. Another common complaint with leasing is that once you sign a contract, you’re “stuck” in that lease until your term expires. However, sites like Swapalease and LeaseTrader allow you to “sublet” your lease to someone else, just like you’d do with an apartment.
Most of the time, wealthy people pour money into assets and investments that go up in value, not down like cars do. Warren Buffet, for example, drives around a used pick-up truck during much of his personal time. He has lived in the same house that he bought about 30 years ago. He’s wealthy because he knows that possessions are a horrible investment and they rarely buy the happiness that they promise. Similarly, leasing a car doesn’t build any kind of financial value.
On the other hand, to some people, their car is an important part of their life. They love the feel of driving around a new car, and they love not having to worry about maintaining an older vehicle. Sure, leasing a car is akin to renting a house; you’re paying money out each month, none of which builds equity for you. But this might not be as important as the feeling you get every day from a new car. And that’s fine too. Sometimes, the joy of leasing a new car every few years is worth the extra expense.
Whether you buy or lease a car is a highly personal decision. Like every issue, there are pros and cons. So, think about your passion, your finances, and your personal situation carefully before making a final decision.
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It’s time for a new car and having made the decision to buy, the next question is often not what car, but how you are going to pay for it?
Financing a car can be a minefield to the uninitiated, especially when the salesperson starts bandying about terms like hire purchase, novated leases, residuals and balloons.
Despite the confusing nature of the jargon, most finance products on offer are fairly simple and with a little understanding you can make sure you are getting the best deal for your situation.
There was a time not so long ago when the options for getting a new car were to either buy it yourself or hope that you were given a company car as part of your job. But today the choice is wide open with car finance options ranging from traditional bank loans to novated leases, all aimed at getting you behind the wheel.
In determining what finance product is best for you, you first have to decide whether you should buy or lease. The essential difference here is that if you buy a car, you own it and it is yours to do with as you please.
Leasing a car
Leasing a car means you are only paying for the use of the car and at the end of the lease term, officially, you have to hand it back or take out another lease. The legalities get a bit murky here and in practice, it is possible to buy the car at the end of the lease period under certain types of leasing packages, but we’ll go into that later.
There are no hard and fast rules as to whether leasing or buying is best for you – it’s a topic that should be discussed with an accountant. Having said that, if you use your car for business as well as private purposes, or your employer is willing to include a car as part of your salary package, a car lease is well worth looking at. There can be significant tax advantages, especially for cars in the prestige and luxury sectors.
Although leasing has taken off in the private sector to a large degree in the US and Europe, we still have an ownership culture and while the numbers of private or semi-private lease deals are growing, the vast majority of people in Australia still buy their cars and own them.
Types of purchase finance
Hire Purchase (Consumer Loan)
The most common finance product sold is still the traditional hire purchase or personal loan.
The period of the loan is determined, the interest rate set according to the risk, the value of the loan and market conditions and the monthly repayments are set to pay out the full amount by the end of the term. Terms usually vary between one and five years.
A variation on the hire purchase product known as the balloon payment option is also slowly growing in popularity.
By setting a larger balloon payment for the end of the term which can vary according to individual circumstances, you can reduce your monthly payments to better balance the budget.
At the end of the term, you can either pay out the full amount in one hit or refinance the balloon amount and continue paying off the car in monthly installments.Read MoreHide
Where to shop for Car leases
The growth of car leasing in Australia has, up until recently, been as a result of the number of large businesses running big fleets of cars, who long ago realised there was little point in owning a continually depreciating asset.
They figured why have the hassle of having to maintain and dispose of cars and light commercials which were often turned over in relatively short periods when you could simply pay for the use of the vehicle and leave everything else to the lease company.
Some of the traditional finance companies only have a small interest in leasing so probably the best place to investigate leasing is through specialists like Aussie Car Loans. Because of the volume of business done by Aussie Car Loans, a wider range of products are available and its easy to tailor them specifically for your needs.
Types Of Lease Finance
Car leases fall into two categories as either a finance lease or operating lease and vary in the way they treat ownership, disposal and residual risk on the vehicle.
Finance leases are becoming increasingly popular because of the ability to novate the lease.
As a lease, no deposit or trade-ins are made and the monthly payments are worked out by Aussie Car Loans based on the term of the lease, interest on the finance charge and the residual value of the car at the end of the term.
However, you are the one who takes the risk on the residual and if at the end of the term the market says the car is not quite worth what was expected three years earlier, then the responsibility to make up the difference to finalise the contract is yours.
Although under the definition of a lease you gain no equity in the vehicle, it is common practise under finance leases to make an offer for the vehicle at the end of the term and pay out or refinance the residual to take ownership.Read MoreHide
Novated leases are becoming a very popular way of including a car as part of your salary package to help reduce your taxable income.
You take out a standard finance lease on a vehicle of your choice. You then arrange for the lease payments to be paid by your employer through a novation agreement which remains valid as long as you stay with the company.
The lease payments, running costs and fringe benefits tax (any car supplied to an employee for their private use is subject to FBT calculated on a sliding scale depending on the value of the vehicle and annual kilometres travelled) are then taken out of your pre-tax salary.
If you resign or the words forced redundancy start being bandied about in the canteen, then the responsibility for the vehicle and the subsequent lease payments reverts to you.
At the end of the lease, the choice is there to turn over the vehicle into a new lease, trade it in on a new car on a novated lease or even purchase the vehicle.
According to Joe Martinovic, Aussie Car Loans Managing Director, the main benefits for novated leases lie in the flexibility for employers not having to provide company cars and for employees to decide on the car of their choice.
“The majority of people that do fall into the realm of having a vehicle packaged generally have some component of their salary in the highest tax bracket. The car component comes out of pre-tax so it reduces their taxable income and in many cases for those people it will drop them back into a lower tax bracket. It can make a lot of sense” , he said.Read MoreHide
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