Since buying a car is one of the biggest purchases you can make, it’s important to (thoroughly) review all of your options. Like renting versus buying a house, leasing versus buying a car has its advantages and disadvantages.
When you finance a car, just like when you purchases a home, each payment you make builds equity. Once you pay off the loan, it’s yours free and clear. You can then sell the car at any point and choose how you wish to use that money.
If you’re able to purchase the car outright (without a loan) you can save a ton of cash. Unfortunately, most of us, myself included, don’t have that type of financial flexibility!
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What to Consider When Buying vs. Leasing
1. Your monthly cash flow: Leasing a car often has a lower monthly payment compared to financing a car, since with a lease you’re paying for the depreciation of the car during those years rather than the whole vehicle cost. If you’re living on a tight budget, leasing may be more favorable.
2. Money for a down payment and initial fees: Most lease agreements have low down payments, or you can get the dealer to waive the downpayment, and you’ll pay less for the sales tax on a lease as well. As with the lower downpayment, leasing has a smaller impact on your budget and cash balance.
3. How much you drive: If you drive a lot—over 10,000 to 15,000 miles, depending on the lease agreement—you’ll probably have to pay extra for each mile. Smart Money says that many leasing companies charge 15 to 20 cents a mile for additional miles, but you could pay less (10 cents per mile) if you buy them upfront when you negotiate the lease. Kiplinger notes that although the extra mileage penalty sounds unfavorable, if you plan on trading in a car you bought, you’d be penalized for above-average mileage too.
4. How well you take care of the car: If you’re prone to getting door-dings and scratches on your car or have a high risk of damage to it from kids, a lease may not be for you, because of the wear-and-tear fees. Wear and tear fees vary and would depend on your agreement, but Lending Tree says these are typically limited to the total of three months’ lease payments.
5. If you drive the car for business: When you lease, a portion of the car’s depreciation and financing costs can be deducted on your taxes. Interest on loans to buy a car, however, aren’t deductible. The IRS has a guide for how to calculate the tax deduction for a leased car.
6. How long you plan on keeping the car and how flexible you need to be: This is a big consideration. If you only want to drive the car for a few years, leasing is the most convenient option. However, you’ll pay a lot if you try to get out of the lease before the term is up—as much as six extra months of payments, according to Smart Money. You’ll need to be sure you can stick with the terms of your lease.