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Lease, New or Used: The Smart Way to Approach Car Buying

Money Management | Ben Luthi | October 19, 2020

By Ben Luthi

Ben Luthi has been a freelance writer since 2013, covering all things money and travel. His work has appeared in many major publications and financial websites, including U.S. News & World Report, The New York Times, Fox Business, Experian, FICO and more. Ben lives in Utah with his two kids, and loves spending his free time traveling, hiking and talking about credit cards.

 

When it comes time to replace your vehicle, you may be wondering which path you should take: buying a new car, buying a used car or leasing a vehicle? The right answer for you depends on your situation and preferences, so it’s important to understand how each option works and the benefits and drawbacks that come with them. 

Before you get your next car, here’s what to think about:

 

Leasing a Car

Leasing vs. buying a vehicle is similar to renting vs. buying a home. Instead of financing a car through a lender or paying for it outright with cash, you make payments for a set period — that can be anywhere between 12 and 60 months, depending on the leasing company and your agreement. 

Once your lease is up, you’ll have a few different options from which you can choose:

  • Return the vehicle: If you walk away without replacing your current lease with a new one, you’ll be charged a disposition fee, wear-and-tear costs and mileage fees (if applicable). 
  • Trade in the vehicle: If you want to trade the car in for a new lease, you can trade it in for the same model or a different one entirely. This path allows you to avoid the fees associated with simply ending your lease.
  • Buy the vehicle: When you lease a car, you’re essentially paying for the depreciation. Once the lease is over, you can purchase the car at its residual value. This is another way to avoid the disposition fee, wear-and-tear charges and mileage fees.

Leasing can be an excellent choice for people who always want to be driving a new car without the higher costs associated with buying. But if you don’t want to deal with the limitations of a lease agreement or the loss of ownership, it might not be a good fit.

 

Benefits of Leasing

Leasing isn’t for everyone, but there are some perks that can make it a more appealing option than buying:

  • Always drive new: Leases are typically available for new cars only. If you like maintaining that new-car feel, leasing could be less complicated than buying and selling your car every few years.
  • Lower costs: When you buy a car, your monthly payment is based on its sales price (and if you finance the vehicle, the interest charged by the lender). With leasing, you’re paying for the car’s depreciation plus some fees and interest. As a result, leasing can be significantly cheaper than buying. 
  • Less hassle: If you bought a car and want to replace it, you’ll need to go through the process of selling it or trading it in. If you trade it in, you generally get less value. But if you sell to a private party, the process can be time-consuming. With a lease, you can simply return the vehicle at the end of your term or trade it in for a new one.

 

Drawbacks of Leasing

Although there are some clear advantages of leasing over buying, there are also some potential pitfalls that can sour the experience for you:

  • Lack of ownership: When you buy a car, you own it outright once you’ve paid off the loan. This means you’ll have equity in the vehicle, and you can really do anything you want with it. If you lease, however, you’ll always have a monthly payment, and you’ll never have equity in the car. Also, there are some limitations to what you can do with the vehicle.
  • Strict terms: Lease agreements have strict terms you need to follow, or you’ll end up paying more. For example, you may be limited to driving 10,000, 12,000 or 15,000 miles per year. You may also get slapped with some additional charges if there’s more wear and tear than anticipated.
  • Switching cars: If you decide to lease regularly, you’ll end up switching vehicles every few years. While some may like that idea, others might prefer to stick with one car for the long haul. 

 

Buying a New Car

Buying is more expensive than leasing, at least on a monthly payment basis. But over time, it could save you money, especially if you plan to keep your new car for a long time. New cars are generally the latest model year vehicles that haven’t been owned before. 

If you don’t have enough money to make the purchase in cash, you’ll need to get an auto loan, either directly from a lender you work with on your own, or through dealer-arranged financing. 

Buying a new car can be a great option for people who can afford it, but higher sales prices and depreciation may be a major obstacle for some.

 

Benefits of Buying New

  • Lower interest rates: You can generally get better financing with new vehicles than with used ones. Some manufacturers even offer 0% APR financing if you finance a new car purchase through their financing arm.
  • Warranties: With most used cars, you’re buying the car as-is, which can cause trouble later on if the car has some issues that aren’t immediately apparent. A new car generally comes with a warranty, which covers the cost of major mechanical issues, typically for several years. 
  • New-car feel: Driving a new car is often a better experience. You get access to the latest technology and features, and the performance is generally better than that of used cars.

 

Drawbacks of Buying New

  • More expensive: If you compare the latest model year with the one before that, the difference typically amounts to thousands of dollars. That’s because while new cars are more expensive, they depreciate quickly at first. According to Carfax, you can lose as much as 10% of your car’s value the first month, then another 20% during the first year.  
  • Higher insurance costs: New vehicles are generally more expensive to insure than used ones. What’s more, if you’re financing your purchase, your lender may require more than the standard coverage to protect their investment.
  • Potential for negative equity: Because new cars depreciate quickly at the start, you may end up underwater on your auto loan if you didn’t make a large down payment. This occurs when you owe more money than the car is worth. If you try to sell it or it gets totaled in an accident, you may need to pay the lender back for the difference. You can purchase gap insurance to mitigate this risk, but make sure to read the fine print before you buy.

 

Buying a Used Car

Even buying a used car can be more expensive than leasing a new one, but you’ll still get the benefits of ownership. Used vehicles aren’t all created equal, and the older the car, the more challenging it will be to find one at a good price that’s also in the right condition. 

As with buying a new car, you may need to finance some or all of your purchase if you don’t have enough cash. You can do this through the dealer or work directly with a lender. 

Buying used may be the best option for people who are on a budget or who don’t want to deal with the potential cons of leasing or buying a new car.

 

Benefits of Buying Used

  • Lower prices: Used cars are much more affordable than new cars, especially because they did a good chunk of their depreciating during the first year. So even if you’re buying a used 2020 model instead of a new 2021 model, you could net some big savings.
  • Easier monthly payments: Because used cars are cheaper, you may be able to afford a shorter repayment term than you could with a new car. This means you’ll be debt-free more quickly and enjoy the benefits of ownership sooner, which is a big plus compared to leasing. 
  • Lower insurance costs: The older the car, the cheaper it will be to insure. And if you have enough cash to replace it if it gets totaled, you can avoid collision and comprehensive insurance coverage altogether. Just keep in mind that some models are naturally more expensive to insure than others, even if they’re used.

 

Drawbacks of Buying Used

  • Reliability: Used cars are generally less reliable than new ones, and the older it is and the more miles it has, the more problems you may encounter. Many dealerships sell certified pre-owned vehicles, which undergo rigorous testing for quality, but you may end up paying a premium for that process.
  • Higher interest rates: As previously mentioned, new cars are often cheaper to finance than used cars. The difference isn’t huge, but you definitely won’t have access to 0% APR promotions.
  • Warranties cost extra: If you’re buying a new car, the warranty comes with the vehicle purchase. If you want a warranty on a used car, though, and it’s no longer under the manufacturer’s warranty, you’ll need to pay extra for it, which increases your sales price and monthly payment.

 

Which Option Is Right for You?

There’s no one-size-fits-all answer to how you should buy or lease your next car. As a result, it’s critical that you take the time to consider your preferences and your situation to determine the right fit.

For example, if you’re on a tight budget, an older used car may be your best option. If you have more room in your budget and you like the benefits of leasing, it may be worth considering that path, at least for a few years. Just be sure to read through the full lease agreement to understand what you’re getting yourself into.

Finally, if your budget isn’t an issue and you prefer ownership and the new-car experience, buying new may be the best option for you.


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