Should You Lease or Finance Your Car?

Buying a new vehicle today can feel like purchasing a home, with the average cost of a new car in the United States being over $47,000 as of February 2024. The steep price tag and scarcity due to supply chain issues make it challenging for many buyers. The question is how do you make it affordable for you? Let’s explore some strategies below. 

When searching for a new or pre-owned car, several factors come into play: contracts, loans, maintenance and fees. The most significant decision often revolves around whether to buy or lease the vehicle. This choice depends on your budget, cash flow, credit score, occupation and personal preferences.

As you research and compare leasing vs. buying a car, it’s essential to understand the key differences between the two. Here are the most notable distinctions that can help you decide which option best suits your needs.

Understanding Leasing vs. Buying

Before diving into the specifics, it’s important to understand the fundamental differences between leasing and buying a vehicle:

  • Leasing a Car: You pay to use the vehicle for a set period (typically 2-3 years), after which you can either return the car, buy it or lease another.
  • Buying a Car: You pay for the full ownership of the vehicle, either up front or through a loan, and the car is yours to keep or sell at your discretion.

Costs and Factors Influencing Leasing vs. Financing

When deciding between leasing or buying a car, it’s important to compare the costs and other factors associated with each option. These costs can be influenced by various factors, including your down payment, the term of the loan or lease, the interest rate you qualify for, and the car’s value. Extending the length of the loan into longer terms can help reduce the monthly payment significantly.

If you’re unsure whether to buy or lease, consult your dealership sales representative about current promotions both options and compare the auto loan rate to what the dealership is offering. Ask for the lowest possible price for each to make an informed decision. You’ll want to check your financial institution of choice’s rate for which you qualify within 30 days of when you have the dealership check to ensure minimum impact on your credit score.

Both leasing and buying have their positives and negatives, affecting monthly payments, total car expenses, overall use and value. The best choice depends on your individual needs. Here are a few pros and cons of leasing and buying cars to help you make the most informed choice.

Pros of Leasing a Car:

  • Offers lower monthly payments with little or no down payments.
  • Provides the ability to drive a nicer and newer car for less money.
  • Typically comes with lower repair costs because you are under the vehicle's included factory warranty.
  • Ability to easily transition to a new car every two or three years.
  • No need to worry about the trade-in value of the car at the end of the lease.
  • Provides an option to buy the car at the end of the lease.
  • Pay less sales tax since you don’t pay the sales tax up front. You pay sales tax monthly based on the amount of your payment.

Cons of Leasing a Car:

  • At the end of the lease, you do not own the vehicle and either have to then purchase it, or give it back to the dealer.
  • Leases are limited to a certain number of miles per year and you must pay for any excess miles above your contract amount, some as high as 20 cents per mile which could be a big shock when the lease is over.
  • Leases can have confusing contracts filled with unfamiliar terminology.
  • There is potential to pay more in the long-run for a leased car than if you bought the vehicle outright and kept it for years.
  • You are responsible for excessive wear-and-tear charges at the end of the lease.
  • It can be costly if you need to terminate a lease early.

Pros of Buying a Car:

  • You can modify your car as you please with aftermarket products.
  • You have the potential to save money over the long term if you buy a car.
  • You can drive as much as you like. There's no excess mileage penalty.
  • You have more flexibility since you can sell the car whenever you want.
  • You can use the car as a trade-in on the next car you buy.
  • You will build equity in your vehicle to use if ever needed.
  • Once you pay the car off, you'll have no car payments

Cons of Buying a Car:

  • You might need to pay a higher down payment to avoid owing more than the car is worth.
  • You might have higher monthly car payments than a lease.
  • You could have possible trade-in or selling hassles when you decide to get your next car.
  • More of your cash will be tied up in a car, which depreciates in value.
  • You have to pay sales tax on the purchase price.

Leasing vs. Buying: Which Option Makes Sense for You?

When shopping for a vehicle, weigh all of your options before you commit. While leasing might make sense in the short-term, it’s often more expensive in the long-term. Between continuous monthly payments, mileage limits and other contractual obligations, leasing isn’t as simple as it may seem. 

Leasing is a good idea, if you’re consistently rotating through vehicles every 3 to 5 years, or if you write-off monthly expenses for your business needs. For example, if you’re a real estate agent and want to drive a newer, nicer car every couple years, then leasing might be the best option for you. If you like the idea of owning, the right vehicle could last you 10 years and become an asset you own, keeping you from an endless cycle of monthly payments later on. 
 
As you decide between buying or leasing a car, remember to keep these considerations in mind:

  • Planned use of the car
  • Monthly budget
  • Cash flow
  • Credit score
  • Total costs
  • Taxes
  • Fees
  • Environmental impact (gas, hybrid or electric)
  • Your personal preferences

The decision between buying and leasing a car comes down to a choice of flexibility and affordability versus long-term costs and personal preferences. If you’re short on cash to spend, want low monthly payments and hope to avoid any risk of major repairs, a lease can make sense. On the other hand, if you want long-term affordability, a wider choice of vehicles and the option to drive your vehicles for years to come, purchasing can be the best way to go. Buying a vehicle doesn’t have to be overwhelming. Of course there’s a lot to look out for but being prepared and doing your homework will help make the auto buying process a seamless experience. 

Credit Union Auto Loans: Why SDCCU is a Great Choice

The feeling of purchasing your own car and driving it for the first time should feel special, and SDCCU is here to help with that by making your car-buying process easier. By choosing a credit union auto loan, you can benefit from competitive low rates, personalized service and a community-focused approach. SDCCU offers a range of auto loan options tailored to meet your needs, ensuring you get the best deal possible. Visit sdccu.com/autoloans for more information on how we can assist you. Happy car shopping!

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