If you’re looking to get a new car, you might be thinking, “Which is better, leasing or buying?” Understanding the difference between these two options can help you make an informed decision for your financial future. In this article, we'll talk with Melvin Ramen, Vice President of Consumer Lending at FAIRWINDS, to help break down the difference between leasing and buying a car and how buying can help you get out of debt faster.
The Hidden Costs of Leasing
Leasing a car is like renting a car for a fixed period of time. However, leasing can come with some hidden costs that could cost you extra in the long run.
Here’s how it works:
1. Never-ending Payments
When you lease a car, you are “renting” the car, typically for a 2 to 3-year term. At the end of the lease, you must either return the vehicle as-is or purchase it at its residual value. The residual value is the estimated value of the vehicle at the end of your lease term. This is determined by the leasing company and is the estimated future value of the car. If you consistently lease and renew your term, you will always have a monthly car payment and will not own the car outright.
2. Limited Mileage
Leases come with mileage limits, typically around 12,000 to 15,000 miles per year. “If you go over that mileage, there are hefty penalties to pay when your lease is up,” says Melvin. Exceeding this limit can lead to costly overage fees, and you can be charged for excess wear and tear on the vehicle.
3. Upfront Costs
Leasing a car can be just as expensive upfront as buying a car with a loan term, but remember, at the end of your lease term, you will not own the car. When you lease, you will typically have to cover a down payment, security deposit, and various fees, including an acquisition fee, to cover administrative costs for setting up the lease.
Melvin says, buyers assume that leasing is the better option because of a lower payment and a new car. “It may look like leasing is the cheaper option, but it is not,” he adds.
How Buying Can Help You Save More
When you buy a car, you're making payments to own it outright. “With car ownership, you pay off the loan and enjoy no car payment for years,” Melvin adds. With each monthly payment, you're not only covering the cost of the car but also reducing the loan balance. By choosing a shorter-term loan or making biweekly car payments, you can pay off your debt even faster and save hundreds of dollars in interest over time.
1. Freedom from Monthly Payments
Buying a car with a loan means that you will eventually pay off the vehicle and enjoy years without car payments if you keep your vehicle. While the monthly payment of a loan may cost more initially than a lease, you can take down your monthly payment by choosing to purchase a used car or making a larger down payment upfront.
2. Lower Total Cost
While leasing might seem cheaper in the short term, buying a car can be more cost-effective in the long run. Once you've paid off your car loan, your monthly expenses significantly decrease, freeing up money to help you save or pay off debt.
3. Flexibility and Peace of Mind
Car ownership provides the peace of mind of owning your own car rather than continually paying for a leased car. When you buy a car, you are also not restricted by mileage limits and have the flexibility to use your car however you want.
Melvin offers this advice, “With car ownership if you put the same loan payment in your savings account after the loan is paid off, you can accumulate enough money to pay for your next car in cash. What most people find out is that they are perfectly happy with a slightly older vehicle that runs great and money in their savings account.”
If you’re not sure which option works best for you, talk with one of our experts to determine what is best for your needs and budget.