Leasing or Buying—What’s Best for You?
By Karen Dix
July 2014 View more Finance
Between low interest rates, manufacturer’s rebates, and leasing options, shoppers have a lot to consider before they purchase a new car.
After selecting a vehicle, the next big decision is usually to buy or to lease. The answer depends on many factors, including the driver’s lifestyle, financial circumstances, and the cost of the desired car itself.
“It really comes down to how often you want a new car,” said Jason Bulthuis, financial services manager at Continental Audi. “Leasing is a great way to get something newer with better features that could still fit into your monthly budget.”
Leasing Options
For people who want to drive a new car, either for personal or business reasons, leasing keeps them behind a new, state-of-the-art vehicle every few years. “There is a big difference in technology and safety features between a four-year old car and a new vehicle,” said Bulthuis.
The Chicago Automobile Trade Association reports that about 10 percent of new car registrations in the Chicago metro market last year were leased vehicles. The lessee enters an agreement to use the car for a fixed period of time at a set dollar amount, handled through monthly payments. Lease agreements vary, but in general, cars cannot be modified or driven over the set lease mileage limit without a per mile penalty. When the lease expires, the lessee can purchase the vehicle or trade it in for another leased vehicle.
Leasing is popular and offers tax advantages with businesses that want to provide employees with newer transportation with all the repairs covered under the warranty. Employees who receive a monthly stipend for transportation often choose to lease. “I liken leasing a car to leasing an apartment,” said Heidi Berardi, a credit counselor at familycredit.org. “You have flexibility, but you most likely won’t have anything to show for it in the future.”
Purchasing Power
Before taking the purchasing plunge, Berardi warns clients to be sure their monthly payment is affordable, and to take into account the length of time they will be making payments. “No more than 15 to 20 percent of your monthly income should be spent on transportation costs,” said Berardi. She also advises that everyone should have an emergency backup savings account to continue making payments in case of a financial emergency.
Purchasing a new car creates equity, and the owner can modify the car at will, drive unlimited miles, and eventually recoup some of the investment at trade-in or the sale of the vehicle. However, owners must make their own repairs, but any monthly car payments will eventually come to a blissful end.
Also, manufacturer rebates on new cars allow shoppers to get creative with their financing. Berardi describes one man who had means to buy the car outright but financed it instead to build his credit rating. The rebate offered by the dealer more than covered the low interest on the car loan.
The average car on the road today is 10 years old, so purchasing can be worth it if the owner properly maintains the vehicle. “My best advice is for people to save a couple thousand dollars for a down payment and seek approval for a low interest loan from a credit union prior to car shopping,” said Berardi. “Also, check with credit unions to see if they have any repossessed cars for sale. You can get some terrific cars for a fraction of the price.”
To determine whether leasing or purchase is best, shoppers should weigh the pros and cons of each, then crunch the numbers and determine the best financing options. Whatever the decision, the experts agree the most important part is determining a monthly payment that fits comfortably into the driver’s budget for the entire life of the lease or loan.