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Car Leasing vs. Car Buying

September 14, 2012
When it's time for a new car, you have two options to consider: car leasing vs. car buying. Which is the right option for you? When you lease a car, you pay for the right to use that car for a limited amount of time, whatever the term of the car lease might be, but the ownership of the car is still in the hands of the dealer. When you buy a car, you own it outright, even if you're making loan payments to a bank or the dealer until you have paid full value for the car. As with the question of renting an apartment vs. buying a home, the answer to the question of car leasing vs. car buying depends on the individual.

Car Leasing vs. Car Buying: Which Is Right for You?

To decide whether you will lease or buy a car, it's important to know what each choice entails, including the advantages and disadvantages of each option. Let's start by looking at the benefits of buying a car.

Advantages to Buying a Car

The biggest advantage to buying a car can be summed up in one word: ownership. When you buy a car, it's yours. Even if you take out a loan from the bank or dealer, you are driving your own car off the car lot. Of course, if you fail to make your payments, it's possible that your car will be repossessed, but assuming you are able to make your payments on time, you own the car. When you lease a car, your payments are going to the dealer to help them pay for the car that you are driving, while they retain ownership. Your lease payments may be lower than your loan payments, but that is because all you are paying for with a lease is the right to drive the car. When you own a car, you are welcome to sell it, give it to a family member, use it every day, or keep it as long as you want. When you lease, you have much less flexibility. Another advantage to buying is that you don't have to worry about mileage. Most lease agreements only allow you a limited number of miles over the course of your loan term, and if you exceed that, you have to pay extra. When you own, you can drive as many miles as you want without worry. And finally, once you've paid off your car loan, whether it be over the course of three, four, or five years; you no longer have monthly payments. This can free up a considerable amount of money from your monthly budget -- money that can go towards your savings, travel, education, etc.

Disadvantages to Buying a Car

Interestingly, the biggest advantage to buying a car is in some ways the biggest disadvantage as well. Unlike a home or other investments, a car will virtually always depreciate over time. That means when you buy, you own a depreciating asset. The older a car gets, the more problems it will have, and the more likely you are to want to get a new one. When you buy, you're stuck with that car. If you're tired of it, you have to sell it or trade it in, and if it dies, you need to repair it or chalk it up as a loss.

Advantages to Leasing a Car

In many ways, leasing a car is a lot less of a hassle than owning one. You make lower payments than you would if you had to take out a loan to buy a car outright, and when the term of the lease is done, you're done. You can move on and get a lease on another brand new car without anything lost except the monthly fee you paid to lease your last car, plus any associated fees. Since a car depreciates over time, it may be more to your taste to get rid of your leased car when it has lost a good portion of its value and lease a brand new one that has most of its value intact. In addition, if you do decide you like the car you're leasing, you can usually buy the car for a predetermined amount once the term of the lease is over.

Disadvantages to Leasing a Car

While monthly lease payments are typically lower than loan payments, if you decide to buy your car at the end of its lease period, the total amount you spend -- lease payments plus the buyout price -- will be more than if you just bought the car in the first place. In addition, there are a lot of bothersome fees you may have to deal with if you lease, from an excess mileage fee, to a disposition fee if you have the option to buy and choose to decline it, to an early termination fee if you need to break the lease. When you lease, you'll want to make sure you get gap insurance in case the car is stolen or destroyed before your lease term is over -- another added expense. You may also find that your insurance costs are higher and your credit scores need to be better when leasing a car, since you are being entrusted with the full and unsupervised use of an expensive piece of property that you do not own.

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