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August 09, 2021

Lease or buy a car: Pros and cons before getting your next vehicle

Navigating the market for a new car can be overwhelming, with countless ads touting low monthly payments and favorable lease terms. On the face of it, leasing a new car seems like a no-brainer. After all, who wouldn’t want to drive a brand-new car for a potentially low monthly payment, plus have the option to trade it in for a new one in as little as two to three years? But, in reality, there’s a lot to consider when deciding whether to lease or buy.

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Weighing the advantages and disadvantages of leasing vs. buying

Advantages to leasing include:

  • Lower monthly payments
  • The ability to drive a better (and perhaps newer) make and model
  • Likely no down payment required
  • The potential to trade in every two to three years
  • Lower maintenance costs
  • Paying a lower sales tax than when
  • Possible tax deductions for business owners

Advantages to buying include:

  • Long-term savings
  • No mileage restrictions or overage charges
  • The freedom to sell your car anytime you want
  • The freedom to make after-market modifications to the vehicle
  • The likelihood of building equity over the life of the loan
  • No monthly payments after the car is paid off

Disadvantages to leasing include:

  • Mileage restrictions and charges for overages
  • Potential “wear and tear” charges at the end of the lease
  • Ongoing payments while in possession of the car
  • Nothing to show for your payments at the end of the lease term

Disadvantages to buying include:

  • Likely a down payment required
  • Higher monthly payments
  • Often purchasing a less desirable make and model
  • Depreciation can make selling the car difficult
  • Out-of-pocket repair costs once your warranty expires
  • The extra work of selling the car when you’re ready to buy a new one
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Budgeting for your monthly car payment and expenses

After weighing the pros and cons, take some time calculating how much you can afford to spend on your car payment each month. The general rule of thumb is to spend no more than 20 percent of your monthly net income on a car.

Note that this amount includes all car-related expenses, including insurance and estimated repair costs.

For instance, if your monthly take-home pay is $5,000, your maximum car-related expenses should be no more than $1,000 per month. Log your income and track your expenses in a budget template to figure out how much you can afford to spend.

Also, consider how much you have for a down payment and if you’ll be trading in a vehicle. Both will reduce your monthly payment by lowering the amount you’ll need to finance.

You might be able to eliminate car expenses by using public transportation or even a rideshare arrangement. Compare the costs to buy a car vs. rideshare to see what makes the most sense for you.

Deciding whether to lease or buy

Before you start shopping for your new car, review the advantages and disadvantages of both leasing and buying listed above, adding any additional pros and cons specific to your financial situation.

Decide how much you can afford to spend on a car payment each month. Use an auto loan calculator to determine your estimated monthly payment if you were to finance a vehicle.

Once you’ve spent some time considering your finances and educating yourself, you’ll be better prepared when you start shopping. Most importantly, don’t rush into a decision. Most car salespeople will try to persuade you to buy immediately. However, prices and terms can vary greatly between dealerships.

If you elect to finance a car, take the time to review the loan terms and create a loan summary and payment schedule using a loan amortization schedule prior to signing the documents. Therefore, you understand all costs and fees associated with the loan.

Post-lease or purchase considerations

Regardless of whether you decide to lease or buy your car, you’ll want to ensure that you protect your investment and abide by the lease or loan terms. It’s a good idea to keep detailed records of maintenance and repairs. Use car repair tracker and vehicle service record worksheets to document all work done to the vehicle. Having detailed service records on hand can make selling your car much easier and potentially for a higher price.

Even if you leased your vehicle, you might decide to exercise your option to buy at the end of the lease. If so, you might decide to sell it at some point.

If you leased your vehicle, it’s unlikely you’ll be able to make any major after-market improvements. The lease agreement will also require you to keep the car in good condition or risk being charged for repairs when the lease expires.

Also, be mindful of the mileage that you’re putting on the vehicle. Mileage overages can add up quickly. Dealerships often charge 20 cents or more per mile when exceeding the total mileage allowed under the lease agreement.

If you go over, be prepared for a potentially large bill when you go to turn in your car.

Drive happy

Buying a car is a big decision. Carefully consider the pros and cons of leasing versus buying to determine which option is best for you. Most importantly, spend some time shopping around to find the best deal and the most favorable terms possible.

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