The monthly payment dilemma facing car shoppers today goes beyond picking between sedans and SUVs. With new vehicles averaging $48,699 according to Kelley Blue Book, the decision to lease or buy can significantly impact your financial future for years to come.
Leasing can come with attractive, lower payments, but you’re essentially renting the car’s depreciation with nothing to show for it at the end of the agreement.
Buying, on the other hand, means higher monthly payments, but you’re building equity with each installment. However, with 84-month car loans now making up nearly 20% of new vehicle financing, according to Edmunds, many buyers are stretching payments so long that they’re underwater on their loans for years.
Key considerations
Lease agreements come with strict mileage limits, usually 12,000 to 15,000 miles annually. Exceed that limit and you’re looking at per-mile penalties, which could potentially mean thousands in fees at the end of the lease.
If your commute is short and predictable, those mileage limits become less of a concern. But drivers who are on the road more might find themselves making big payments when returning their leased vehicles.
Other expenses can tip the scales too.
Leasing requires comprehensive insurance coverage, often costing more than what you’d need for an older, purchased vehicle. You’ll also face wear-and-tear charges for anything beyond normal use. Small door dings or stained seats could cost hundreds at the end of a lease.
Buyers face different challenges as their cars age past their warranties and need expensive repairs. Modern vehicles packed with technology mean even simple fixes can run into four figures. Plus, depreciation hits hardest in those first few years, meaning a $50,000 purchase might be worth just $30,000 after three years.
Crunching the numbers
If you’re self-employed and use your vehicle for business, lease payments often provide better tax deductions than loan interest. Some manufacturers also offer aggressive lease incentives that can beat financing deals, especially on luxury vehicles or slow-selling models.
The flexibility factor matters too. Life changes quickly, and committing to a seven-year loan when you might need a different vehicle in three years could prove costly.
But if you’re buying and plan to keep your car for seven years or more, you’ll typically come out ahead financially. Once your loan is paid off, you’re driving payment-free while a perpetual leaser continues shelling out $400 to $600 monthly.
That’s assuming you’ll actually keep the car that long. If you’re someone who gets itchy for new wheels every few years, leasing might prevent you from taking depreciation hits on trade-ins.
Making the best choice for you
Ultimately, your decision hinges on your lifestyle and financial goals.
Be sure to consider all your options and calculate the total cost of each, including insurance and maintenance. Remember to add potential mileage and wear charges for leases. For purchases, factor in depreciation and repair costs based on how long you’ll keep the vehicle.
Once you’ve done the research and crunched the numbers, you can decide whether a lease or purchase is right for your next ride.
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