If you are in the market for that hot new sports coupe or SUV but think the price is just a little too steep you may want to look into leasing instead of buying. With any vehicle, there are both advantages and disadvantages to leasing. On the other hand, the same thing can be said regarding buying a car outright. So, what does all this mean? Well, in short, you must look into all of your options in order to find the car that is the best fit for you financially.
When leasing a vehicle there are many factors that you want to consider. First off, you must realize that you are only paying a portion of the total cost of the car. The portion that you are paying is the portion that you are using, in simplest terms. For example, three years and 36,000 miles—and the depreciation associated with it. However, it is worth noting that in many cases you will be required to pay a down payment when leasing a new car, and that is the turn-off financially. Giving the money to the dealership upfront will help to lower your payments but it will also allow the dealership to protect themselves if you were to default or create a loss of some sort. One nice thing though is sometimes you have the option to purchase the car at the end of the contract for the cars depreciated value. This will negate the upfront down payment, but keep in mind that in three years or whathaveyou, you will be very tempted to “try” a new car and repeat the cycle. No the smartest move in our opinion for a young adult who has other priorities. Leasing makes sense for those that NEED a fancy car for their line of work (think Realtor etc.) and need to upgrade to the latest model every few years and who can write it off entirely as a business expense.
Moving on to buying. When you are buying as opposed to leasing, there are some major differences. First off, you pay for the entire price of the vehicle regardless of how much you use it (unless you sell and have someone “take over payments”). As we know, when leasing you only pay for what you use, rather than the entire value at once. In addition, when buying a car there is also almost always a down payment required as part of the financing. The down payment will help to get the monthly payments of the vehicle lower, and help you avoid a potential upside-down situation. When buying a car however, the monthly payments will almost always be higher than if you leased the exact same thing. Keep in mind that the interest rate for your loan when buying a new car is determined by your credit score. This is not always the case with a lease. With a lease you pay a financial rate or money factor which is close to, but not the same as, an interest rate. In short, if you have poor credit that requires a high interest rate then your monthly payments could balloon out of control when buying, but leasing may not help you much either.
Most of the time though we recommend buying used, and especially a CPO (certified pre-owned) with dealer financing if you must purchase a car that you need to finance. Heck, if you can snag a 2.9% loan like my neighbor just did for his CPO-d 2007 BMW 3-series, than there’s little reason to give the bank all your cash at once. If you’re a young adult though, we’d recommend buying a less fancy car, but still don’t think that financing is automatically bad since you are paying interest. Anything under 5% is not bad (get a cosigner if you’re quoted 10% or more), and if you are young and in your twenties the boost in your credit score for successfully paying off a motor vehicle is one of the best you can get.