There is no end to our love of cars. But when it comes to car financing, everyone has their limits. For some, paying cash for a car is the simplest way to get one. They drive off the lot knowing that they own the car completely and can do whatever they want with it. But then, there are as many, or perhaps even more, who are not in a financial position to buy a car with cash.
The truth is that for the majority of us, it comes down to two finance choices:
While most people prefer car loans or buying with cash, about one-third of car drivers around the world lease their cars.
The choice between leasing a car or buying one usually depends on priorities. While some view having a car only as a matter of monthly payments, others tend to form an emotional connection with their car. Therefore, it is imperative to understand the difference between the two choices before heading to a dealership.
The real question is: which choice is better from an investment perspective? The answer to that question will depend upon your personal preference, lifestyle, and, most importantly, your cash flow.
Let’s dive deeper to find out if benefits of leasing outweigh those of buying or vice-versa!
What is Buying and Leasing a Car?
When you choose to buy a car, you go for any of the two methods of car financing. This includes getting a car loan or simply paying the cost in cash. More often than not, people go for car loans because they are more financially convenient. You make monthly payments and you have complete ownership at the end of the term.
A car lease, on the other hand, is a contract in which one party (lessor) permits another to use a vehicle for a specified period of time. In exchange the lessee makes periodic payments, typically monthly installments to use the car. The lessee has to return the car at the end of the lease period unless the contract allows them to purchase the car at the end of the term.
Buying vs Leasing a Car
There are as many benefits of leasing as there are for buying a car. The key is to find out which of those benefits matters to you the most. Before you make up your mind for either of the finance choices, you must know the difference between the two.
Here is how buying differs from leasing:
If you go on to purchase a car, the biggest advantage is that you get to keep it for as long as you want. On the other hand, if you lease a car, you can only use it for as long as the contract allows and have to return it at the end of the lease period. If the contract allows you to purchase the car at the end of the contract, then can you pay the cost of the car and get sole ownership.
The purchase of a car includes cash price or a down payment in case of a car loan, taxes, registration, and other fees. Whereas a car lease includes payment for the first month, a down payment, a refundable security deposit, an acquisition fee, taxes, registration, and other fees.
Loan payments in car financing are usually higher than lease payments. This is mainly because you are paying off the cost of the vehicle, interest, taxes, and other fees. Similarly, in case of a lease payment, you only have to pay for the car’s depreciation in the lease period, interest that is usually referred to as rent charges, taxes, and other fees.
If you purchase a car, the vehicle depreciates. However, the cash value of the car provides you equity and it allows you to sell it after you have the ownership. While the future worth of a car in a lease does not affect you financially, you don’t have any equity in the vehicle either.
When you purchase a car, you have the freedom to drive as many miles as you want. But an important thing to remember is that higher mileage lowers the car’s future worth for resale. On the other hand, a car lease limits the number of miles you can drive the car. While you can negotiate a higher mileage limit, the lessor will charge you extra if you exceed the mileage limit.
Wear and Tear
Once you have bought a car, you do not have to worry about wear and tear of the vehicle. Apart from the worry that it could lower your vehicle’s future worth, you have nothing to worry in this regard. Here is a blog post that goes through in detail on the wear and tear of car.
On the other hand, when you lease a car you are held responsible for excessive wear and tear. You have to pay extra charges if you exceed the normal wear and tear limit.
After going through the benefits of leasing and buying, it does seem that the buying option has an edge over leasing. Apart from having the complete ownership of the asset, the annual insurance cost is lower, and sometimes even the taxes as well. So, while leasing is generally cheaper in the short term, buying a car is less expensive in the long run.
Regardless of the option you choose, do some research and plan beforehand. If you need a smart solution to financial planning before you head into a purchase or lease, download the Doctor Money app right now. And remember, the option you choose will also commit to your other financial goals at the same time.