Pros and Cons of Leasing vs. Buying a Car
Outside of buying a house, acquiring a new car is one of the largest financial decisions one can make. In many ways, it is also a more difficult financial choice. Do you buy a new car or a used car? Do you need a sedan, an SUV, or a truck? And unlike houses, cars begin to depreciate as soon as you drive them off the lot, increasing the risk that you may end up owing more on the car loan than the vehicle is worth.
Then there’s deciding between leasing vs. buying a car. Depending on your personal situation, it can be difficult to determine which is the better option. It’s even more complicated in 2022, because supply chain shortages have driven up the prices of new and used cars and leasing terms. To help guide you through the decision, we’ve broken down some of the numbers and other considerations to help steer you through this process.
Monthly Costs
Pros of Leasing: The simplest way to distinguish between buying and leasing is to think of leasing as a long-term car rental. When you lease a vehicle, you get to use that car for a set period at a flat monthly rate. The appeal of leasing is that the month-to-month payments can be less than what they would be if you purchased the car. If low monthly payments are your priority — say, if you only need a vehicle short-term — leasing will save you money each month.
Cons of Leasing: Keep in mind any additional costs on top of your monthly payment. Leasing often requires an acquisition fee, security deposit (often equal to one month’s payment), and a cancellation fee if you break your lease early, and a disposition fee at the end of your lease term to cover cleaning and resale of the vehicle. You are also still responsible for paying taxes and registration. In Texas, leasers are also taxed on the total amount of the lease for the duration of the lease term. Still, most of the time, these costs will not exceed a down payment on a new car purchase.
Pros of Buying: Although you will spend more upfront when you buy a car instead of leasing one, once you’ve finished paying off the loan, you’ll no longer have monthly car payments. Over time, someone who continually leases cars will spend more than someone who buys cars. If you are looking for the most cost-effective option long-term, it is always better to buy a used car and pay the note on the loan down as fast as possible, minimizing interest payments. You can also sell a car you own, giving you cash to pocket if you owe less on the car than what you can sell it for.
Cons of Buying: Sometimes our life situations don’t afford us the time it takes to pay down a car loan and realize the full cost benefits of a vehicle purchase. Buying only becomes more cost-effective if you’re planning on keeping your car for long enough to realize the investment or if you think you’ll be able to sell it profitably.
Maintenance Costs
Pros of leasing: As with any car you’re responsible for, dents, scratches, and other cosmetic damage will come out of leasers’ pockets. However, leased vehicles also come with a three-year bumper-to-bumper warranty. That means you won’t be stuck with any unforeseen maintenance costs throughout the duration of your lease. Furthermore, some leasing contracts roll the costs or routine service checks, such as oil changes, into the deal. The leasing companies want to resell the vehicle at the end of the lease term, so it behooves them to spend the money on making sure it is well maintained. It’s an attractive upside of leasing: the peace of mind that you don’t run the risk of some big, expensive car mechanic bill.
Restrictions
Pros of buying: When you lease a vehicle, your contract will set a limit on the number of miles you drive each year. Typically, this is 10,000 or 12,000 miles, but you can bump that up to 15,000 for a higher monthly payment. If you exceed this annual maximum, you might be charged a penalty of 15 cents per mile over, depending on your contract. And if you want to customize your vehicle, forget about it — leased vehicles do not allow add-ons. So, if you like feeling unencumbered in how you operate and treat your vehicle, buying is for you.
Pros of leasing: Many people who lease their vehicles like the flexibility it affords. This isn’t just about staying in the latest fashionable vehicles. Perhaps you know you need a minivan for only the few years your kids will remain in bulky car seats. Perhaps you anticipate a move in a few years that will change your automotive needs. In these cases, the lower monthly costs of a leased vehicle may be more attractive than the long-term promise of a paid-off auto loan or a vehicle sale.
Insurance
Regardless of whether you lease or buy a car, your approach to acquiring the right insurance for your new vehicle will be the same. Both auto loans and leasing contracts will likely require comprehensive coverage and collision coverage. Both buyers and leasers will want to consider purchasing gap insurance. This will protect buyers from any damage that exceeds the total owned on an outstanding loan and protect leasers from any costs that exceed what is owed on the loan or lease.
As you begin the process of weighing leasing vs. buying a car, call your Texas Farm Bureau Insurance Agent. They can help guide you toward the right decisions for your insurance needs. If you’re weighing your options for leasing vs. buying a car for a new driver in your household, here’s a guide to choosing the right vehicle for your teen.
Coverage and discounts are subject to qualifications and policy terms and may vary by situation.
© 2022 Texas Farm Bureau Insurance
