If you’re in the market for a new car, there are a lot of important decisions in your future, from financing to features. One of the first things you’ll need to determine, though, is whether you want to buy or lease an automobile.
Both buying and leasing have their advantages, so it’s not an easy choice to make. On the buying side, you’ll one day own the car outright, and your payments will eventually end. However, you’ll also end up with higher monthly payments, a hefty down payment, and your car’s value will depreciate over time.
On the leasing end, both the monthly payments and upfront cost are likely to be lower, but you also have to count on always having a car payment since you’ll never actually own the car. Plus, you might be dealing with mileage restrictions and higher insurance costs for a leased automobile.
We talked with Andrew Schrage, Editor-in-Chief at personal finance blog Money Crashers, about the pros and cons of buying versus renting. He offered several tips for determining which decision might be right for you.
Find the highlights from our buying versus leasing conversation below.
NetCredit: Can you talk a little bit about the pros and cons of buying versus leasing a car?
Schrage: If you’re the type of person who likes to get behind the wheel of a new car every few years, then leasing may be a better option for you. If you typically drive the same car for long periods of time, then buying a new car is best. Unlike leasing, buying a car will allow you to maintain ownership of the vehicle after it’s paid off. If you continue to drive the car after it has been paid off, you save money by not having a monthly car payment. The monthly payment when you purchase a new car is generally slightly higher than when leasing. You may be also restricted by mileage when leasing a car.
NetCredit: Whether leasing or buying, what are some tips for figuring out how much you can realistically afford to spend on a car?
Schrage: There are plenty of online calculators available that can help you determine how much you can afford. Or, use the 20-4-10 rule: You should be able to put 20% down on the car, the terms of your car note should be four years of less, and the annual cost of the car payment (plus annual insurance costs) should not exceed 10% of your yearly income.
NetCredit: For those with less-than-perfect credit, is there one option (buying vs. leasing) that makes more sense?
Schrage: Unfortunately, there is no perfect answer. You may not even qualify for a lease because of your low score. And if you buy a car, you will pay more in interest than if you had a better credit score. Your best bet is to work towards improving your credit score before acquiring a car.
NetCredit: Can your decision to buy or leas affect how much you end up paying in insurance expenses?
Schrage: When you lease a car, you usually pay more for insurance. This is because the bank or lending institution requires that you purchase gap insurance on top of a standard auto insurance policy. This covers the amount left on the lease should you get involved in a serious accident that totals the car.