Deal of the Day

What is the Difference between Buying and Leasing a Car?

What is the Difference Between Buying and Leasing a Car?

When it comes to getting a car, you have two options: buying or leasing. But what’s the difference between buying and leasing a car? In the automotive industry, leasing is like borrowing or renting a vehicle until you decide you want to purchase it. Buying a car outright or through financing guarantees ownership; however, that option still comes with an incredible amount of personal responsibility.

What are the Advantages of Leasing a Car?

Leasing a new car is tempting. After all, the lower monthly payment makes leasing irresistible, or at least a more appealing alternative to purchasing a vehicle outright. Because you’re only paying for the vehicle’s depreciation costs off the total value of the car, the monthly payment is often lower than it would be if you bought or financed it.

For those who want to find out what it’s like to drive a certain model without committing to ownership, leasing a new car is the epitome of “try before you buy.” You get to enjoy a brand new car for a lower monthly payment because you’re only paying for the vehicle’s depreciation costs throughout the term of the leasing agreement. When contrasted with purchasing a vehicle, where you’re either buying or financing the entire amount, you may end up with fewer fees at the end of your lease term.

What are the Disadvantages to Leasing a Car?

While many lease plans appear cheaper than buying or financing a car, there are often hidden costs involved with leasing. These include initiation and disposal fees, as well as early termination fees if you choose to end your lease earlier than the final loan payment date.

Most likely, the additional fees you can accrue will be for extra mileage on the car. Because it can be challenging to predetermine the exact number of miles you will drive in a year, you may end up going over your allotted mileage on the leasing contract. Most mileage restrictions are between 10,000 to 15,000 miles, with 12,000 miles as the most common amount specified on a contract. Depending on the amount of the fee, each additional mile over the limit can become expensive. For example, at .25 per extra mile, driving 5,000 miles over the lease agreement will result in paying $1,250 before any other fees.

What are the Advantages of Buying a Car?

Buying a car gives you ownership and total control over your driving. Although it’s an incredible responsibility to undertake, buying also gives you a lot of freedom in the long run. Once you make the final payment, you get to keep the car for as long as you can maintain it. You also have the option to customize your vehicle the way you like it, from window tinting to rims and everything in between. If you’d like to have a particular audio or GPS system installed into the console of your car, you can do it because you’re paying towards eventually owning your vehicle outright.

Upon your final payment, you’ll also get to control every aspect of your ownership experience. You’ll also receive the title from the lender. You can drive as often or as seldom as you like without any restrictions on your mileage. If you live in an area where public transportation isn’t readily available or if you live in an area or state that’s spread out, like California and Texas, owning a car for the long term is ideal if you can afford the maintenance costs.

What are the Disadvantages of Buying a Car?

Sometimes buying a car isn’t an affordable or realistic option. Not everyone can afford the hefty down payment required to qualify for a lower monthly payment. To avoid getting upside down on the loan, you should put down at least 10 to 20 percent of the car’s total loan value. Because many lenders require this amount upfront, a larger down payment can prevent you from ending upside down on your car loan.

But when you don’t have the funds to do this, or if your credit score isn’t high enough, you may have less bargaining room with the dealer. Having a lower credit score can also affect the interest rate you will qualify for, which can ultimately increase the monthly payments and result with you owing more on your car loan.

If there’s a specific car you want to own but it’s just outside your budget, you can still get it. However, this is not necessarily the best long-term financial strategy. Although you can extend the length of a loan term to six or seven years, this will often result in you getting upside down on your car loan. As your vehicle depreciates with every passing mile and year, you end up owing more on the vehicle than it’s worth. If that’s the case, you’ll be left with what’s known as negative equity.

Plus, a longer loan term results in more compound interest. If you’re unable to increase the monthly payments on your loan to pay it off faster, you’ll end up owing and paying far more on the car than if you’d taken out a shorter loan term. And if you want to trade in your car for another model, you’ll still owe the balance leftover on the previous loan.

Should You Buy or Lease a Car?

Before you commit to leasing or buying your next vehicle, take time to evaluate your short term and long term financial goals. Do you want to eventually own a car outright and not have any payments on it and drive it until it can’t run anymore? Or do you enjoy driving a flashy, brand new car every few years and don’t want to commit to owning a vehicle? Whatever you choose, figure out what your budget is and consider your lifestyle, driving habits, credit history and other factors before you make your decision.

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