When your car is on its last leg and it’s time to start looking for another vehicle, you may wonder which is better: leasing or buying? The answer: it depends. Leasing a car has many short-term benefits but long-term drawbacks. Here’s what you need to know to decide if it’s a good move for you right now:
Downsides of Car Leasing
Leasing a car is more expensive in the long run
There is no shortage of personal finance expert diatribes against leasing a car and for a good reason: leasing a car is more expensive than buying one in the long run. Car lease payments are designed to cover the depreciation of the car between the lease start and end date. Typically, a new car loses 31% of its value within the first two years and more than 42% in the first three years. This means you pay for the car’s depreciation when its value is declining most rapidly. You never benefit from those years of lower depreciation and the freedom from having a car payment. Additionally, car prices generally increase over time. Each time you lease another vehicle, your payment is based on the market value of the car at that time, meaning that all else being equal, your car payment will increase every two to three years when you sign a new lease.
Car leases are difficult to get out of
A lot of life can happen in two to three years: you can move out of state (or out of the country), have another child or two, or even lose your job. Leases don’t offer much flexibility to pivot in the event your personal or financial circumstances change within that time. Unless you can find someone to take over your lease or purchase and then sell the vehicle, you’ll be stuck with it (and your payment) until the end of your term.
Upsides of Car Leasing
Car leases have lower monthly payments than purchasing new
Leasing a car offers a lower monthly payment compared to buying the same vehicle new. The average lease payment is about $600, compared to the average monthly payment of a new car at roughly $740 per month. The monthly cost of leasing is lower because it covers the expected depreciation of the car between the time your lease starts and ends, rather than its full value. It is worth pointing out that for the lowest monthly payment overall, buying a used car wins out with an average payment of $523.
Car leases require little-to-no downpayment
Most of the time, leasing does not require a downpayment, making it an appealing option for buyers who don’t have extra cash on hand. With a sub-optimal credit score, a small downpayment might be required. Buying, on the other hand, often requires a down payment of 10%-20% of the car’s value, with 14% being the average.
Leased cars are less likely to need repairs than used cars
As highlighted above, buying a used car will result in a lower payment than leasing, but a used car is also more likely to require repairs. If these additional out-of-pocket expenses have the potential to be a major financial burden, leasing might make more sense in the short term. If you don’t have an emergency fund, repairs will likely end up on a credit card and cost you an extra 20%-30% annually in interest.
Final Thoughts
Leasing a car can be a good short-term option for a buyer with a tight budget and little savings. However, because it will cost more in the long run, the buyer should use the extra budget flexibility to work on paying down debt and building savings to be in a better position to buy a car at the end of their lease.
