How To Know: Should I Lease A Car Or Buy A Car?
Car buyers ask: “Should I lease a car or should I buy one?” The answer is simpler than you’d think. There are some obvious scenarios when leasing a car is better than buying one, and you should know them when you see them.
What Is A Car Lease?
A car lease is a form of car ownership between a car buyer and a car dealership.
When you choose to lease a car from a dealership, the dealership gives you a car for a certain number of years with the pledge that you’ll give the car back after those years have ended.
Leasing a car is similar to having it on loan.
You drive the car and treat it as your own. When your lease is over, you return the car back to the dealership as-is. There’s no negotiation and no hassle in the hand-off. The car belongs to the dealership again and the dealership will want to resell it.
Except now, the car is worth less than when you bought it. The car has depreciated and the dealership can’t get the car’s original price.
Car lease payments are designed to offset depreciation.
If your dealership expects a car to lose 35% of its value in the next three years, your next three years of lease payments will be roughly equal to that same thirty-five percent.
This is the reason why car payments are lower for leased cars. Buying a car means paying 100% of its value to the dealership. Leasing a car means paying for the car’s depreciation only.
How much your car will depreciate during your lease depends on three things:
- The type of car you’re driving
- The amount of driving you’re doing
- The wear-and-tear of the driving you’re doing
The length of your lease will matter, too. Most leases are 3 years in length. There are options for shorter or longer leases, though. The longer you lease your car, the more it’s expected to depreciate.
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Great Reasons To Lease A Car
Choosing to lease a car or buy one is a personal decision.
There are obvious scenarios when it will make sense to lease a car instead of buying one; just as there are times when buying a car is the best possible choice.
However, because leasing a car and buying a car are so different, we can use the strengths of the car lease program to help identify whether leasing a car is right for you.
“Should I lease or buy a car?” Use these points to decide.
1. Technology in cars is important to you
Leasing cars puts you into a brand-new automobile every 3 years or so. For drivers who like technology, this is a big winner.
Technology in cars is advancing quickly; much faster than it did when our parents were growing up.
Just a few years ago, it was rare to get USB ports in cars and collision detection systems. Bluetooth systems were clunky and camera-assisted parking was a luxury.
Today, auto makers are adding heads-up displays, automatic emergency braking, and blind spot monitoring to even entry-level vehicles.
When you lease your car, you get access to the latest technology and safety advances every several years.
2. You don’t have money for random car repairs
When you lease a car, you can expect to pay less money for routine maintenance to your car, and to be protected against bigger things that go wrong, as compared to the buyer of a car.
This is because leased cars often come with bumper-to-bumper warranty coverage, and free routine maintenance.
Bumper-to-bumper warranty coverage pays for anything that goes wrong with your car. This includes minor issues like an oil leak, and major problems including complete engine failure.
With a lot of leased cars, your only added cost is fuel.
3. You want to drive the most luxury car you can afford
When you lease a car, you’re not making payments on its sticker price. You’re making payments on the auto’s expected depreciation during the time of your lease.
Most leases last 3 years. In three years, the typical car depreciates by half.
This means that when you lease a car, you pay for roughly half of its original sticker price. Half the sticker price of a luxury car is often less than the complete cost of a standard car.
For the same car payment, leasing a car affords you a higher level of luxury.
4. You use your car primarily for business
You’re entitled to tax deductions when you use your car for business. You get deductions for miles driven, auto insurance costs, parking tolls and fees, and more.
For people who lease a car, though, there are distinct advantages as compared to drivers with a car loan.
Drivers with a car lease have permission from the IRS to deduct huge portions of their monthly payments for their car, based on how much they use their cars for business purposes.
If you use your car 80 percent of the time for business, for example, the IRS allows you to deduct eighty percent of the payments you make on your lease. This can make leasing more attractive to car shoppers — especially small business owners and entrepreneurs.
Note that this is not tax advice. It’s tax information. Speak with your tax preparer about deducting car lease payments on your tax returns. Everyone’s tax situation is different.
5. Your commute to work is pretty short
The more miles you drive a car, the more it loses its value.
This is why leasing is advantageous to drivers with a short commute to work, or who take public transportation. Lower mileage on the car leads to cheaper payments on the lease.
Remember: your car lease payments are based on the portion of the car’s value you’re expected to use. When you’re driving fewer miles, you’re using less value.
Most leases allow you up to 15,000 miles per year on your automobile. Leases are best if you can remain within your limit.
- If your commute to work is 10 miles each way, that’s 5,200 miles each year
- If your commute to work is 15 miles each way, that’s 7,800 miles each year
- If your commute to work is 20 miles each way, that’s 10,400 miles each year
If you take the bus, train, or subway to work, your annual mileage will favor leasing a car over buying one.
See The 100 Cheapest Cars To Lease
Disqualifiers: Reasons Not To Lease A Car
For a lot of drivers, it’s better to lease a car than to buy one. Payments are often less expensive and leasing a car offers flexibility to drive newer, safer cars every few years.
However, disqualifiers exist. Just because the math is right, there are certain conditions that will make leasing a car less of a good decision.
1. You haul equipment, gear, and pets regularly
Your car lease payments are determined by the value of your car on the date your lease is over. The dealership considers the make and model of the car, the amount of miles you expect to drive, and the car’s condition when you bring it back.
A leased car that’s beat up by heavy gear and equipment; that’s dinged and damaged from a job site; or, that’s torn up by pets is going to cost you money.
On the day you return your car back, the dealership will inspect the car for damage and defects, passing you a bill for problems beyond just “wear and tear”.
For drivers who drive hard, leasing a car can lead to unexpected payments.
2. You like to customize your cars
When your car lease ends, the dealership expects that you’ll return the vehicle in its original condition. Dings and dents are okay, but anything else will require a fix. And you’ll pay for that fix.
Cosmetic modifications are usually okay, such as tint. However, painting the body or changing the engine is a no-no. Same for cutting holes for speakers and modifying the suspension.
If you’re a driver who likes to customize the car you’re driving, don’t lease — buy.
3. You have pretty terrible credit
Your car lease is a financial agreement between you and a car finance company. The agreement requires you to submit your credit scores, which are used as part of the lease.
Drivers with below-average credit pay higher rates on their leased cars, which can make leasing a less attractive option.
In general, below-average credit is defined as being maxed-out on credit cards with a very recent history of bankruptcy or foreclosure. If this is an accurate description of your credit history, buying a car may be better for you than leasing.
Buying a car instead of leasing? Get today’s auto loan rates.
Shop For Cars By Lease Payment
There are lots of good reasons to lease a car instead of buying one.
Maybe you like to drive a new car every few years; or, maybe you drive your car for business; or, maybe you want to drive an upscale car model. None of these are bad reasons.
Leasing can be smart, financially. And, because leasing a car is all about monthly payment, use that monthly payment to help you shop.
Don’t look for cars by sticker price. Look for cars by monthly cost. When you’re leasing a car, it’s the better way to shop.
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