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Auto leasing vs. buying: What’s best for you?

If you are in the market for a new set of wheels, you’re probably wondering if you should lease or buy. Though 80 percent of Americans financed their cars at a dealership in 2016, leases hit an all-time high of 4.3 million that same year, according to the “Lease Market Report” from edmunds.com.

What’s right for you?

There are pros and cons to leasing and buying a car, but deciding what works best for you depends on your needs and more importantly, your finances. First, consider your budget, calculating how much car you can afford, including a down payment and monthly costs. Next, factor in your primary use for the car, be it commuting, weekend cruising, or both. Finally, start the comparison process.

A closer look at leasing. More car for “less”?

Here are four things to keep in mind about leasing:

  1. Cost: The average new car loan came in at more than $30,000, according to a 2017 auto market finance study from Experian. Leases typically have lower upfront costs, as well as lower monthly payments, making it more attractive to some buyers. On the flip side, when you lease, you have a permanent car payment and when the lease ends, will have nothing to show for it—no car to drive, trade in, or sell.
  2. Choice and maintenance: With leasing, you can drive a new or almost-new car without a long-term commitment. In addition, repairs will likely be rare or non-existent and maintenance will be mostly oil changes, tires, and brakes. Finally, if you want to keep up with the technology, leasing could be a good option since you can upgrade when the lease ends.
  3. Mileage: Even the most affordable leasing deals can severely limit how much you can drive. The typical mileage limit is 12,000 per year, though some lenders will let you go up to 100,000 miles, says Edmunds. However, if you pick a lower-mileage lease and go over your limit, you’ll pay a surcharge for additional miles, around 10 cents to 25 cents per mile. With nearly 25 percent of U.S. workers commuting more than 42 miles per day, according to the U.S. Department of Transportation, extra mileage costs can quickly add up, making leasing far less of a bargain.
  4. Depreciation: While you’ll pay less sales tax with a purchase, leases are more expensive over time, partly because you’re always making a car payment. Another cost factor is depreciation. Once you drive a new car off the dealer lot, its status goes to “used” instantly, and so does its value. Translation: you pay for that decrease with each new lease. While new-car buyers also take the initial depreciation hit, driving the car for more years lessens the total cost.

The Bottom Line: At the end of the lease you’ll be financially responsible for any damage or excess wear and tear to the car, including scratches and dings. Second, if you end the lease early, you’ll pay hefty termination charges, which could hurt your credit.

Is buying better?

Consider these three “options” before buying:

  1. You buy it, you keep it: Buying means the car is yours for as long as you want, plus you choose what you want. Also, you can drive your car with no payment after you’ve paid off your loan, helping you offset maintenance costs, save cash for your next car, or free up cash for other things. Over time, the cost of leasing versus buying the same car means you might spend more upfront, but end up with a valuable asset that reduces your overall cost.
  2. Choice and maintenance: With buying, you don’t have to worry about mileage allotments or keeping the car in pristine condition. Another plus for buying is that you can choose from used and new vehicles. Some dealers lease used cars, but they can be hard to find. Buying gives you more flexibility.
  3. Cost to buy/own: As much as owning your own car can be a benefit, it also can be a drawback. New cars are expensive, coming in at more than $30,000. At best, you’ll be tied into a car loan of four years or more, so this plays an important role in your choice. Plus, if your car is stolen or wrecked, you’ll have to come up with cash to pay off the loan, as well as any insurance deductible costs. Lastly, keep in mind that the longer you have the car, the faster you might outgrow it.

The bottom line: If you’re considering a new car, keep in mind the “startup” costs, including the down payment, taxes, and a car loan. If you’re the type to keep your car long after paying off your loan, you will have to deal with the arrangement and cost of repairs and maintenance, along with finding a reliable mechanic and as your car ages, the potential for it to become unreliable. When it does come time to sell, you can face expensive repairs to make your vehicle marketable, as well as the trouble of selling or trading it in.

Driven by personal preferences

Deciding to buy or lease a car comes down to a choice of flexibility and affordability versus long-term costs and personal preferences. If you’re short on cash, prefer low monthly payments, and want to avoid any risk of major repairs, a lease can make sense. However, if you want long-term affordability, more vehicle choice, and are not concerned with upgrading and wear and tear, buying might work best for you.

No matter what you decide, weigh your options carefully and enjoy the ride.