For many people, a car is the second largest expense after housing. Whether you’re in the market for your first set of wheels or need to replace the old family car, you’ll want to weigh your options carefully, balancing the need for a reliable vehicle with budgetary constraints and other factors.
Car leasing has resurged in popularity over the past few years—in fact, Manheim’s 2012 Used Car Market Report states that the number of new leases increased by 17 percent between 2010 and 2011—but it’s not for everyone. Similar to financing a car, auto leasing will usually require a credit check and a down payment (although some leases are available for zero down).
We talked to Patrick Olsen, Cars.com’s editor-in-chief, to discuss the pros and cons of leasing versus buying a vehicle.
Leasing: The Pros
Higher-end cars may be more affordable – Cars that have high residual value tend to have low monthly leasing rates because the company knows it will be able to sell the vehicle after the lease. “If you like to have a new car every several years, leasing is a good way to go,” says Olsen. “You can get into the newest cars with the newest technology, such as heated seats or Bluetooth, whereas if you buy a car you might have to wait.”
Depending on the down payment, the lessee’s credit score, and the model of the car, leases often charge around $199 per month, adds Olsen. Financing a comparable car would often mean a higher monthly payment depending on the down payment. The other benefit to leasing is that you’re generally leasing new cars, which are still under warranty. However, your insurance costs may be higher because the leasing company’s requirements may differ from the state’s insurance standards.
Leasing: The Cons
Excess mileage fees – Leasing might make sense for occasional drivers, but those who commute long distances or take frequent road trips should keep in mind that there are often significant fees for exceeding the annual mileage allowed in the lease. Olsen says the mileage limit is typically between 10,000 and 15,000 miles per year, although that can be negotiated upfront in some cases.
Turn-in fees – Olsen says drivers with pets or small children should think twice about leasing a vehicle, as stained seats or other damage can lead to high turn-in fees. “Most automakers expect that car to be turned in in really good condition,” he explains. “They don’t expect there to be a permanent art display in the back seat.”
Constant car payments – In some cases, drivers have the option to purchase their vehicle at the end of the lease, but in general, leasing means always having a car payment, making it more challenging to save for a down payment on the next vehicle or other financial goals.
Buying: The Pros
No mileage restrictions – If you commute long distances, drive your car for work, or take frequent road trips, owning a vehicle means you won’t have to pay for excess mileage. Of course, you’ll still have to pay for gas and maintenance on that high mileage.
No fees for damage or wear and tear – “If you need to carry muddy logs around [in your car], you can do that,” points out Olsen. Dings or other damage will lower the resale value of your vehicle, but it won’t cost you as much as turning in a damaged vehicle to a leasing company. If you’re planning to drive the vehicle long-term, then the eventual resale value may not matter as much to you anyway.
Ownership – Buying a car means that “after you’ve spent all this money, it’s an asset that you can do with as you want,” says Olsen. “The average ownership of cars is 11 years and the average car loan is 64 months. Once you’ve finished, you’re driving the car without making payments.” Not having a car payment offers more flexibility in your budget, allowing you to save up for your next vehicle or put the money towards other goals.
Buying: The Cons
Depreciation on new cars – As soon as you drive a new car off the lot, it depreciates in value, an issue that both lessees and owners face. That’s why Olsen says his “first choice would be to buy something used where someone else has paid for that depreciation.”