UPDATED: May 12, 2022
Looking for a new car? There are a lot of decisions that need to be made before making the right purchase. If you’re not paying cash, a buyer is faced with an important decision; should I buy or lease a new car? Let’s kick the tires on both options.
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Borrowing the Money
When most people think of getting a new car, the first option that pops into their minds is to get a car loan and purchase the vehicle. An outright purchase is the simpler, more common option.
With a financed car purchase, the process is relatively straightforward. Your bank, credit union, or car dealer loans you the money to buy the car, and then you pay them back over time. Payments are fixed throughout the duration of your loan, and you’ll pay the cost of the principal and interest.
Loan terms can range from 12 months to 60+ months, depending on how much you would like to pay each month. In general, the longer it takes to pay off the loan, the more interest a borrower will pay.
Payments are made in monthly installments. Over time, you pay down the loan balance. At the end of the loan term, you own the car outright.
There are two ways to get a car loan. One is through the bank, credit union or loan company of your choice. The second is to work with the dealership finance office, which arranges your loan.
Bank or Credit Union Loan
Getting a car loan through the independent source (not at the car dealership) of your choice is often the least expensive. This is especially true if you have a decent credit rating. You go to the bank or credit union and file for a prequalification or preapproval.
With prequalification, the bank will do a “soft pull” of your credit and essentially give you an idea of whether or not you’d be approved with full application, and how much money they’d let you borrow.
Preapproval is a bit more definitive: they’ve given you a purchase limit and interest rate. Some experts say preapproval is better, because there is less chance of the financing falling through or costing more money than expected. However, either will allow you to make a budget and go shopping. Then, look for a car in places your potential lender has approved.
Once you’ve chosen your car, negotiate the price, it’s time to choose your desired loan terms. The dealer will help you with all the paperwork to get the loan funded.
Car Dealership Loans
Like the name implies, dealer financed loans are initiated through the dealership financing arm. Most dealerships will have you fill out their own credit application, then send it around to the banks and finance companies they work with.
When you see those ads on TV offering 0% financing on a brand new car, this is generally the way they’ll do it. If your credit is good enough, you’ll probably be offered that deal. If not, other financing sources will be offered. Pick the one you want, and then sign the paperwork.
Leasing a Car
Leasing a car is essentially a long-term rental, which remains owned by the finance company. In order to get a lease, you’ll usually have to go directly to the car dealer, choose the car you’d like, and let them handle the paperwork. That’s because leases are generally only available through dealerships, even if they work with more than one leasing company.
Leases are more complicated than financed purchases, because the driver will never be the owner, even when the lease is up. Leasing companies have to look at the resale value of the vehicle after it has been driven for the 2-3 year term of your lease, and these are determined in part by make and model of the car, mileage, and overall condition.
With that in mind, the lease is priced to compensate the leasing company for the wear and tear, as well as the depreciation of the car. Added to this is a finance charge, called a money factor, and some other fees. You’ll also be restricted to a maximum number of miles to drive the car during the duration of your lease.
When you return the car to the dealership, they will examine the car for wear and tear. They’ll also check the odometer to see if you’ve gone over the mileage limit. Lessees returning their cars with too many miles, or with excessive damage, will have to pay out-of-pocket to compensate the leasing company for that loss in value.
In practice, this means that if you aren’t careful there can be some expensive surprises at lease end. Finally, keep in mind you’ll never own a leased car unless you buy it later. This is important when deciding whether to buy or lease a new car.
Which One is Better?
When you need (or want) a new car, it can be hard to know if buying or leasing a car is the better option. After all, both options have their advantages and disadvantages. Generally speaking, the answer depends on the driver and their individual needs.
When Buying is Better
There are several reasons why you might be better off buying your car instead of leasing it.
- You drive a lot. Unlike leased vehicles, those that are bought with a loan or outright can be driven as much as necessary with no additional costs. Sure, there’s wear and tear on the vehicle, but you won’t pay that and a mileage fee.
- Your credit is less than perfect. If you have damaged credit, it’s nearly impossible to get a lease. Fortunately, getting a car loan and paying it off on time will help improve your credit score.
- Less risk in case of an accident. If your leased car gets smashed up, then it’s someone else’s property that gets damaged. It’ll be much harder to get the car repaired if you have a war between the leasing and insurance companies. To deal with this, you’ll often end up with gap insurance on a leased vehicle, adding to the expense.
- Buy a car when you want to own the vehicle outright. This has a number of benefits, including the fact you’ll eventually own the car and save on making payments. You also can sell the car or trade it for a newer one.
When Leasing is Better
As attractive as owning your car might be, there are still situations where leasing a car might make sense.
- You don’t drive much. When you only drive a few miles a year, leasing is an economical option. Just make sure you don’t drive more than allowed, because that’ll get expensive.
- You need lower payments. Because leasing only pays for depreciation and wear and tear, lease payments tend to be far lower than purchase payments.
- Staying on warranty is important. With leases, you’ll only have the car for 2 or 3 years. Unless you have a higher mileage lease, this will mean you’re turning in the car before the manufacturer’s warranty expires.
- If you need to keep up appearances. People in some careers like to be seen in expensive cars, because it projects success. By leasing, you can get a more expensive car and always be driving a recent model year.
The Bottom Line
Buying and leasing have their unique advantages and risks. You should carefully consider your financial situation when deciding to buy or lease a new car.