Lease vs. Buy: The Right Route to a New Car
Your hatchback has hit the skids, and you’re considering leasing your next set of wheels. But is that the right route to take?
Leasing is increasingly popular, with nearly 25 percent of American drivers leasing in 2013, up from about 12 percent in 2009, according to Kelley Blue Book, a car-valuation company. Why the rise? For one thing, it costs less up front to lease than to buy. For a lease, you’ll generally need to hand over the equivalent of one month’s payment for a security deposit, plus an acquisition fee of $400 to $700. When you buy, however, you may have to provide a down payment ranging from 10 to 20 percent of the price of the car.
The monthly payments on a lease also tend to be lower than those on a regular car loan. A compact car that lists for about $20,000, for example, would cost about $170 a month to lease and about $350 a month to buy, according to Alec Gutierrez, a senior analyst for Kelley Blue Book. And you won’t have to pay for repairs for the length of the lease (typically three years).
But leasing has its drawbacks. If you plan to keep the car for more than three years, the cost benefit of a lease decreases. That’s because loan payments for a car that you own build equity over time, which means that “you’ll get something back when you sell or trade in your vehicle,” says Philip Reed, a senior editor at Edmunds.com, a car-information site.
Leases also come with some restrictions. The biggie is that there’s a cap on the number of miles that you can drive (usually 10,000 to 12,000 miles a year). Road-trippers, beware: If you exceed the mileage cap, you’ll have to pay 15 to 20 cents for every extra mile, which adds up fast. Also, if you don’t return the car in excellent condition, you’ll have to reimburse the dealer for repairs.
The bottom line: If you plan to ditch the car after a few years, choose a lease. Anyone looking for a long-term investment or who will rack up heavy mileage should opt to buy.