For a lot of people in the United States, having a car is a necessity. Without one, they can’t get to work or the grocery store, can’t get their kids to school. However, cars are also a major expense, and figuring out the best way to make it work for your budget is tricky.
Do you sign a lease? Do you take out a loan? It depends on your personal situation.
What Is the Process for Leasing a Car?
Leasing a car is a bit like renting an apartment. You sign an agreement with a dealership for a set amount of time where you will be leasing —renting—the car from them. Most leases are from two to four years. To sign a lease agreement, you’ll need to bring an ID, proof of insurance, and proof of income. There’s often a down payment.
During the lease, you make monthly payments and get to drive the car as if you own it. At the end of the lease, you can renew it or lease a different car. Some leases might have a rent-to-buy option.
To make the most of your lease, you can often negotiate the terms. Start by comparing several different offers so you know your options. You can often negotiate things like:
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Cost
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Amount of down payment
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Trade-in value of your current vehicle
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Rental charge
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Mileage limit
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Purchase option
The FTC also recommends getting a copy of your credit report and having the dealer send you the total price of the car before you go to the dealership.
The Pros of Leasing a Car
A lot of people prefer leasing their cars for a number of reasons.
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Leases often have lower monthly payments because you’re just paying the difference between the car’s value when it’s new versus its expected value at the end of the lease.
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Upfront costs are generally lower, too. Leasing tends to require a lower initial down payment compared to buying.
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Usually, the cars you lease are the newest, latest models. This means it’s often still covered by a manufacturer’s warranty.
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The latest car models also come with the latest equipment and features. It could be a much more luxury vehicle than you can afford to buy.
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You avoid depreciation. Vehicles start losing value the moment they leave the lot. With a lease, you don’t have to worry about that.
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There are potential tax deductions if you are leasing the car for work.
The Cons of Leasing a Car
There are downsides to be considered, too.
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Most leases come with mileage restrictions. To keep it from getting excessive wear and tear, you often aren’t allowed to drive it more than 10,000-15,000 miles per year. If you do go over, you’ll incur fees of anywhere from $0.10 to $0.50 per mile.
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You consistently have monthly payments. When you finance a car and make your payments, you will eventually pay it off and own the car outright.
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You have to keep the car in good condition. Any excessive wear and tear — which is decided by the dealership — will result in fees.
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Higher insurance may be required. Depending on the lease agreement, you might need to carry higher levels of coverage.
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Ending the lease early could cost you fees. If you find you don’t like the car or the payments get too expensive, you might get hit with penalties.
What Is the Process for Buying a Car?
If leasing a car is like renting, buying a car is a little like buying a house. In both cases, you are applying for a loan so you can make a big purchase. In both cases, you often need a down payment that covers a percent of the total cost.
If you’re wanting to buy a car, you can apply for a car loan at the dealership or at a credit union or bank. The details of the loan will outline how long the loan will last — usually between 3 and 7 years — and what your monthly payments will be. Those payments will include interest on the loan.
Like leases, you can negotiate parts of your auto loan:
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The annual percentage rate (APR) and interest rate
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The length of the loan, which affects how high the monthly payment is
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Optional add-on products and services
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The value for any trade-in car you have
The Consumer Financial Protection Bureau notes that you should also have auto insurance ready and know about any manufacturer incentives.
The Pros of Buying a Car
For those who choose to finance and buy a car, these are some of the benefits:
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You have real ownership. The car is yours to keep without worrying about changes you make or its condition.
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It builds equity with a set limit. This just means that you’re not making payments with no end in sight. Once the car is paid off, the money you spent every month toward its cost is now freed up for saving or spending elsewhere.
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There aren’t extra fees for changing your mind. If the car isn’t a good fit and you want to get a different one, you have the option to sell or trade it in and put that money toward another model.
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It can benefit your credit. Since payment history is a major factor in your credit score, having a car payment that you pay regularly can give you a boost.
The Cons of Buying a Car
A lot of people find financing and buying a car a bad fit for their lives for reasons like these:
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Monthly payments are higher. Financing spreads out the expense, but you still have a bigger bill each month than when you lease.
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The car’s value depreciates. This is an especially big drop during the first few years.
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Maintenance and repair can be costly. Because you own the car fully, once the warranty expires, you are responsible for any issues that come up.
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Your upfront cost will be larger. It’s to your benefit to put a large down payment on the car to reduce the overall cost of the loan, but you may need extra time to save up for that moment.
Whether You Lease or Buy Comes Down to You
Leasing versus buying a car—either path has positives and negatives. It depends on you, your finances, and what your needs are. If your main priority is a lower month-over-month bill and you’re not worried about building equity, leasing might be best. On the other hand, if you can manage a higher monthly payment in exchange for owning the car outright down the line, buying seems like the stronger option. The important thing is to take your time, do your research, and know your options before putting your hard-earned money on the table.
