When it comes to obtaining a car, there are two main options you can take; You either buy or lease it. In this article, we will explain what car leasing means, the leasing options available, the terms and conditions considerations, and its pros and cons. We will then explain the main options available for buying a car, any determining factors that may affect the buying process, and then its pros and cons.
There is no one size fits all answer when deciding if leasing or buying a car is best as it comes down to personal circumstance. Both have their advantages and disadvantages which we will go through in this article.
Leasing A Car
Leasing a car is when you rent a car for an extended period with monthly payments. You will often find that most people take out a lease of around 36-48 months where at the end of the lease agreement, you return the car. In short, leasing is a long-term car rental agreement.
Types of car lease
- Open-End Lease – Once you reach the end of the lease contract, you make a final balloon payment to cover the remaining cost/ market value of the car.
- Closed-End Lease – Also known as a Walk Away Lease where you are free to “walk away” at the end of the agreement. You do not need to purchase the car or refinance.
Closed-end leases have more rules than an open-end, such as annual mileage restrictions as the financer must take on the depreciation cost at the end of the contract. However, you take on the depreciation costs with an open-end lease.
Factor That Affects Lease Payments
- Sale Price – Naturally, sales price and lease payment are proportionally related. The higher the sale price, the higher the monthly payments.
- Lease Length – If you are leasing a car for a longer/ short duration, the lower/ higher the payments.
- Mileage – There are limits in leases that restrict the lessee on the number of miles you can drive. The higher the annual mileage, the higher the payments
- Resale Value – The car’s expected value at the time of the last payment
- Taxes and fees – If the tax and other fees are higher for the car you choose, the lease payments will be proportionally affected.
Advantages of Leasing A Car
- Variety – You can drive a new, different car every couple of years
- No depreciation – After every three-year price of a new car goes down by 60% – you do not have to worry about this with a lease
- Tax benefits – You can maximize your tax deductions by leasing a car as you will get a higher tax write off than the surcharge over a loan.
- Save money on maintenance – Many lease agreements offer a warranty for a minimum of three years, so you do not need to worry about paying for a full car service.
- No resale worries – You return the car at the end of the lease, therefore, there is no concern for selling it on.
Disadvantages of Leasing A Car
- No equity – By leasing a car, you cannot build equity because when the lease ends, the vehicle gets returned.
- Mileage restrictions – You cannot drive the car as much as you may need as you have annual restrictions that you cannot exceed with incurring a penalty.
- Cannot be modified – No matter how desperately you want that modification, you cannot have it.
- Wear and tear – You may incur charges at the end of the lease if there is major wear and tear.
- Limited options – Many cars are not available for leasing as multiple car manufacturers do not provide the facility for leasing.
Buying A Car
If you buy a car, you get complete ownership of a vehicle and will acquire an addition to your assets. This means you can do with it what you want, and you take on both the good (full autonomy, no restrictions) as well as the bad (depreciation, maintenance).
When it comes to buying a car, you have the following options:
- With cash – If you have enough money to purchase with a single payment, this is the best option.
- A bank loan – If you cannot buy it in one go, you can opt for a personal loan with a bank. With a loan, you pay back the full cost in monthly instalments with interest. With this, you will end up paying more than the car’s value due to the added interest.
Advantages of Buying
- Drive as much you want – There is no mileage limit for you when you buy a car. You drive it as much as you like.
- Modifications – You do not have to ask someone for permission before making any changes.
- Equity building – You are adding equity to your asset profile by purchasing a car.
- Resale – If certain conditions arise when you need money urgently, you can sell the car whenever. Or if you find yourself no longer using it, you can sell without worrying about ongoing payments.
- Long term value – If you are looking for long-term use, buying a new car can give you long term value.
Disadvantages of Buying
- Depreciation – Every year, the market value of your car depreciates. For example, if you want to resale after three years, you can lose up to 60% of the initial purchase price.
- No variation – Unlike with a lease, you cannot get a new car every couple of years (unless you are super wealthy).
- Mistakes are not acceptable – If you made a mistake while deciding on the car type, company, and features offered where you find you do not like it, you may regret it for an exceptionally long time.
- Not affordable for everyone – Not all people can afford to buy a car due to the increasing associated costs.
So, that is our basic comparison between leasing and buying a car. Hopefully, you can make a decision based on your own personal circumstance and judgment. Whether you are going for a lease or purchase, always remember to drive safely and enjoy your ride.
James Banerjee is an Account Director who graduated from the University of Kent in 2014. He works in SEO on clients such as HSBC UK and Nestle and he has a keen interest in personal finances and money-saving advice.