When it comes to buying versus leasing a car they both have their advantages and disadvantages. From a financial perspective, you need to determine what works best for you before you decide which option to go with.
First, let’s talk through the difference between the two.
Buying a car
When you buy a car, you own it outright. This can be done by either paying cash upfront or by taking out a car loan (also known as a note) where you make monthly payments with interest until you have paid off the car in full. You will save the most amount of money if you pay cash up front.
Leasing a car
Leasing a car on the other hand, is when you only pay for a portion of the car (it’s depreciation) with interest while you are driving the car based on a lease agreement. Once your lease term is up, you are required to return the car as you do not own it outright—think of it as a long-term car rental. The benefit is that you don’t have to worry about dealing with a depreciating asset.
So, which one is right for you? Below are a few questions to ask yourself to help make your decision.
How long do you intend to keep the car?
If you only intend to keep the car for a couple of years, the cost of leasing a brand new or newer model car can be much less than buying one. Your total lease payments for a short lease term will most likely be cheaper than the full cost of buying a car outright.
If you plan to keep the car long term, buying may be cheaper in the long run. For instance, if you were to factor in the costs of leasing a car for 48 months versus the cost of a car loan over the same time period (including interest payments), you may find that the lease amount is more than or close to the amount you would pay if you bought the car with a loan. The same would apply if you compared the lease amount to paying cash for the car upfront.
What will you be using the car for?
If you are self-employed or your car is for business use, then you may be able to get certain tax breaks from writing off the car as a business expense or by deducting the depreciation and lease financing costs.
If the car is for personal use, then you are not eligible for any tax breaks or deductions.
How much driving will you be doing?
When it comes to leasing car, the one big catch is that you need to stay within the miles determined in your lease agreement. If for whatever reason you go over your allotted miles, you’ll have to pay for the extra mileage which can add up quickly. In addition, you’ll also be responsible for any damages that occur (e.g. scratches, dents).
If you own your car outright, you can pretty much drive it as much as you like and any damage that occurs will be up to you as to whether or not you choose fix it.
To make sure you are making the right financial decision when it comes to buying or leasing a car, it’s important you can answer these three questions in addition to running related calculations to see what makes the most sense for your current life