Lafayette Federal Credit Union
Vice President, Business Development
If you’ve ever purchased a car before or are currently in the process, you may be wondering: is it better to lease or buy my next vehicle? You’re not alone. Consumers nationwide face this decision on a daily basis. Fortunately, by taking some time to educate yourself on some key considerations, you can make a wise decision when the time comes to get your next set of wheels.
First, it’s important to understand what it means to lease a vehicle. In its simplest form, leasing a car is similar to "renting.” You pay to use it for a predetermined period of time, and then return it when you’re done. Typical car lease terms are three to four years in length, and are tied to certain requirements that you must follow during that time.
The most significant difference between leasing and buying is that when you purchase, the car is yours to keep indefinitely (barring any issues, such as unpaid or past due loan payments).
Though there are things to consider when making this decision, being educated is the best way to decide what is best for you. Below, we have outlined the most important items to take into consideration:
One major advantage to leasing a vehicle is that the monthly payments are usually lower than when you buy. This is mostly because this option doesn’t require you to pay off the full price of the car.
The tradeoff is that you don’t own the vehicle, and though the payments are cheaper, you will be paying a lease during the most expensive and depreciative years of a car’s life.
Leasing a car does not require a down payment, but there are upfront fees you should be aware of. When you lease, you’ll typically have to pay a security deposit, acquisition fee (background check and insurance verification), first month’s car payment, and taxes and registration.
Buying a car will require some of the same costs as leasing (i.e. taxes and registration), but can also requires a down payment, which means you may pay a larger sum initially. In the current market, with cars in short supply and prices for new cars averaging over $47,000 Opens in New Windowas of December 2021, typical down payments will naturally increase. However, if you have saved up some cash for your purchase, this might not influence your decision.
Leasing May Mean More Frequent Vehicle Shopping
Since leases terms typically span only 36 to 48 months, you will likely be in the market for a new car every three to four years.
While some people enjoy shopping for cars, others do not. If you find the car-buying process tedious and time-consuming, buying a car could spare you some hassle and might be one reason to choose this option instead.
A New Lease Means a New Car
An upside to leasing is you typically get to drive newer cars with the most current technology and safety features. Since lease payments are generally lower than the monthly payments on a purchased or traditionally financed vehicle, this might even allow you to drive a nicer car than you would otherwise be able to afford if you were buying.
The downside is that, if you continue to lease, you’re always enduring a monthly payment. If you’re okay with a payment every month, leasing might be the right call. If you’d like to eventually enjoy a payment-free vehicle, buying may work better for you.
Mileage Limits on Leased Cars
It’s important to note that lease agreements generally have mileage limits. When you exceed them, you will pay for it. You could pay 10 to 50 cents for each mileOpens in New Window you drive over the limit defined in your contract
If you are behind the wheel more often than the average driver, leasing may not be best suited for you. Alternatively if you drive less than the average, leasing could be a great option. Standard mileage limits on a lease are around 12,000 milesOpens in New Window. In 2019, it was estimated that the average American drove over 14,000 milesOpens in New Window, so you need to understand the mileage requirements in your contract and how much you intend to drive when deciding to lease or buy.
One more note on mileage limits: It is possible to increase the mileage limits on your car’s lease, but you’ll likely have to pay more upfrontOpens in New Window. Keep in mind that you won’t be reimbursed for miles that go unused!
Maintenance Costs for Cars
A major benefit to leasing is that you likely won’t have to pay much out of pocket for normal maintenance. Since most cars come with warranties that tend to span the length of a traditional lease period, most (if not all) off the upkeep on your car should be wrapped into the cost of your lease.
You should understand, however, that car warranties will not cover all maintenance needs; for instance, replacing tires, which may be expensive on a newer, high-end vehicle. Also worth considering is how much wear and tear you anticipate; when you turn your car in, dealers will charge you for any deterioration that their inspectors don’t consider "normal.”
You Have to Keep a Lease "As Is”
Just as a dealer will inspect for excess "wear and tear” at the end of a lease, they will also make sure that you didn’t make any modifications. Part of the agreement with a leased car is that you will return it the same way you received it.
If you think that at any point you may want to alter or enhance your new vehicle in any way, buying a car may be the better way to go.
Lease Break Penalties
There are usually penalties you can incur if you break the leasing contract early. If you think you may not be able to complete a lease for the full term, you should probably opt out of this option, as lease break penalties could potentially cost you thousands of dollars.
On the other hand, buying a car allows you to sell it or trade it in if your circumstances change. This means you could potentially pay off the remainder of your loan and take care of any other financial obligations may arise.
Tax Deductions for Leased Vehicles
If you use your car for business purposes, leasing could allow you to expense the monthly paymentsOpens in New Window. You should always first check with your tax specialist, but the IRS does allow for mileage and depreciation deductionsOpens in New Window on vehicles used for work.
If you do intend to deduct your lease payments due to business use, you will want to keep meticulous records throughout the year.
No Resale Worries When You Lease
Another benefit to leasing is that it can be simple once the lease term is over. Take the car back to the dealer, hand over the keys, and you’re down with the vehicle (barring any issues).
Selling a vehicle you’ve bought outright can be more tedious and time consuming, but you reap the benefit of whatever equity has been earned on the car, as you’ve paid it off over time. If you choose to sell a car you’ve owned, working with authorized dealers who buy used cars may make this process much simpler.
Ultimately, how you finance your next car will depend a lot on your personal circumstances and preferences. The best thing you can do is to make an informed decision before you sit down to buy. To guide in your decision, you should be able to answer the following questions:
Know the answers to these questions ahead of time, and weigh out the pros and cons mentioned above, so that you will be in the best position to choose the right option for you. .
One last note. Before visiting a dealership or dealing with a private seller, it’s important to know that negotiation can take place whether you purchase a car to own or when you lease a car. Many people don’t know that you can negotiate the terms of a lease, but you often can. Industry incentives in 2021 reached record lows of 3.9%Opens in New Window, but this doesn’t mean you shouldn’t try to negotiate. Whether you buy or lease always keep your best interests in mind.
We know that buying a car and finding the right financing can seem complicated. Your partners at Lafayette Federal Credit Union are here to make it as simple as possible. Our team has the knowledge and experience to help walk you through the process of buying your next vehicle, so you feel comfortable with the decision you’re making.
We provide competitive auto loan rates and terms in the Washington, D.C. metro area. Presently, we offer loan terms up to 84 months and APRs as low as 2.375%Opens in New Window. We also offer financing up to 125% (based on the Automobile Invoice Service Manual’s appraised value) on any previously unregistered or untitled vehicle purchased from a licensed dealer. Members are also eligible for the Green Auto Loan discount, which offers 0.125% percent off on U.S. EPA-designated Smartway certified vehicles. Interested members can contact usOpens in New Window or stop by one of our branch locations where a Member Service Representative can assist.
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