Are you in the market for a new ride? Getting a car loan isn’t the only way to get into the driver’s seat; you also have the option to lease a car. If you own a business but don’t drive many miles, a lease may be best. But if you have kids and dogs and are constantly on the road, a loan may be the better alternative.
Regardless of which option you choose, each has its benefits.
The Case for Leasing
If you haven’t given much thought to leasing your next car, it’s worth considering. There are several perks leaseholders enjoy that those who finance don’t:
1. Lower monthly payments
Car lease payments are usually lower than loan payments because you are only paying for the car’s depreciation over a certain term.
2. Lower upfront costs
Do you have stellar credit and steady income? You may qualify for a zero-down payment lease program, which means you don’t have to bring thousands to the table to get approved. You’ll also be able to pay the sales tax, registration and other fees over the life of the lease because these costs will be rolled into the loan.
3. Buyout options available
What if you fall in love with the car and want to keep it? You can exercise your option to buy it out at the end of the lease agreement if the dealer is offering a good deal.
4. Depreciation is not an issue
Most lease programs span three years. If you decide not to buy the car you have been leasing, you turn it back into the dealer. You don’t have to worry about trade-in value or how much the car has depreciated. But keep in mind that you could be assessed excessive wear and tear fees. “Most dealerships do offer a policy that would pay these extra charges, but the policy increases your payment,” according to Trey Schmidt, president of Calloway Auto Buying.
5. Tax write-off
Will you be using the car for business? If so, a lease may be a better option, because you can write off a portion of the monthly payments, based on the percentage use of your car for business. On an auto purchase loan, only the interest on the loan is deductible as a business expense. See IRS Publication 463 to learn more.
6. You’re not on the hook if the car is a lemon
On occasion, you hear about consumers who are stuck with lemons and how the dealership won’t cut them a break. Fortunately, most major repairs are covered under the manufacturer’s warranty when you lease. (But you’ll still be on the hood for routine maintenance unless you buy the service package, if applicable). And if you get a lemon, you can work with the dealer to swap the car out.
The Case for Buying
The key reason to buy a car versus lease a car is that you own the vehicle and can keep it as long as you want. Other benefits include:
1. No mileage caps
If you drive a lot, you may be better off purchasing your new ride. Most lease agreements mandate that you drive no more than 10,000 to 15,000 miles, annually. If you exceed it, you’ll often have to pay a fee for every mile over. If you’re set on leasing, inquire about higher mileage packages before you sign the lease.
2. Credit isn’t always an issue
Bad credit doesn’t mean you won’t qualify for new-car financing. There are several options beyond “buy here pay here” lots but prepare to pay higher interest rates. For guidance on how to find the best loans for bad credit, check out How to Get an Auto Loan With Bad Credit.
3. You can customize the car
Once you sign on the dotted line to finalize the loan, the car is yours, and you can customize it. This could mean getting a paint job, adding rims, installing a sound system, or doing whatever you’d like to make your dream car shine.
But when you lease, you won’t have this option because the car must be returned in the original condition.
4. No early termination fees
You may have to negotiate the value of your vehicle if you trade it in and you still owe on the loan. But unlike leases, there’s no early termination fee if you turn the car in early.
5. No wear and tear fees
If you buy a car and run it into the ground, you won’t have to worry about paying extra fees for excessive wear because the car is yours to keep. When you decide to trade it in, it could ding your resale value, but the loss in value will probably be lower than the fees you’d incur with a lease.
5. Future value
Unlike leasing, buying allows you to build equity in the car as you make payments. And when you decide to sell, you can use that cash value to offset the price of your new car if you choose to trade the old car in. You can also use the cash value to secure an auto equity loan.
6. Lower car insurance premiums
Buying over leasing could save you a bundle on car insurance. “Most lease companies require a “100/300/50″ auto insurance policy, so your auto insurance premiums may be more expensive,” notes Schmidt.
The Bottom Line
Leasing may be a better option if the monthly payments on the car you want will stretch your budget too thin. But be sure to read the fine print and carefully assess your financial situation to avoid getting in over your head.
If you’ve decided to buy, be sure to see what loan options are out there before settling on an offer. To help you get started, take a look at SuperMoney’s auto loan review and comparison tool. With this tool, you can explore loan rates and view customer reviews.
Allison Martin is an accomplished finance writer who has written for publications including The Wall Street Journal, MoneyTalksNews, The Simple Dollar, and Credit.com. Her work has been featured on Fox Business, Yahoo! Finance, MSN Money, and ABC News. She enjoys writing about personal development, entrepreneurship, personal finance and is a Certified Financial Education Instructor (CFEI).