New Cars: Leasing vs Buying
The age old question of, “to lease or to buy” is a common question we get at Forest Lake Auto Group. You’re probably here because you’re asking that same question. Should you lease your new car or buy your new car? Naturally, because most people tend to do so, you’re leaning towards buying your next car. Is that your best option, though? For many people, leasing is the smarter option when compared to buying. Let’s discuss why that may be the case. If you have any questions, visit us today in the Twin Cities of Minneapolis, MN and St. Paul, MN.
What is the Difference?
As you probably already know, when you buy the car, that car becomes yours. You own that vehicle and (depending on your financier) can do whatever you’d like with it. You can drive it as often as you’d like for as many miles as you’d like, sell it whenever you’d like, and modify it as much as you’d like. However, leasing is a bit different. Sounds great right? Well there’s more to it than that. Leasing has its pluses and minuses too.
When you lease a vehicle, you’re financing the depreciation of the vehicle over a set time period. You pick up your vehicle from the dealership, use it for a set amount of time and return it when your lease’s term length expires. You may also opt to purchase your vehicle at that point. Your lease agreement will be made up of a few main components; lease term, mileage restriction, money factor, and the residual value.
- Lease Term // The lease term is the duration of your lease. At the end of your lease term, you will return your vehicle or opt to buy it at a negotiated purchase price. Lease term lengths are typically 24 – 48 months in duration.
- Mileage Restriction // Mileage restrictions or limits are annual restrictions to the amount of miles you are allowed to put on your leased vehicle. Because leases finance the depreciation of the car over your term length, additional miles will have a negative effect on the residual value. Typically, going over your allotted mileage will result in some minor additional charges.
- Money Factor // The money factor is a simple mathematical calculation of your interest rate that is used to determine how much you’ll be paying in financing. Just like interest rates, your money factor will be determined based on your credit score and available incentives. The money factor is calculated by dividing 2,400 from your interest rate percentage. A 3% interest rate is equivalent to a a 0.00125 money factor.
- Residual Value // The residual value is the expected value of the vehicle at the end of the lease term. The residual value is used to calculate the depreciation and payments of your lease.
With that, your lease should be a little more understandable. In basic terms, your lease is set for a lease term with mileage restrictions and a money factor to determine your residual values and payments. At the end of your lease term, you return your vehicle or choose to buy it.
You may be wondering why you might want to bother dealing with the complication of a lease. When you buy a new car, you don’t have to worry about mileage restrictions, residual values and lease term lengths. Leasing has plenty of benefits that, for some people, outweigh the benefits of purchasing.
Leasing Benefits and Drawbacks
For some people, leasing is a better option than purchasing. Under most circumstances, leasing will have significantly lower monthly payments than if you were to buy the same car outright. This is because you are financing the difference between the purchase price and the residual value at the end of your term. When you are purchasing a vehicle, you are financing the entire price of the vehicle.
However, the financial benefits of leasing are usually only realized by people who cycle through newer cars more often. When you purchase a car and hold it for long after your payments are over, your dollar is going to travel a lot further than if you were to lease a new car every 2 – 4 years. However, if you tend to buy new cars and sell them after a few years, leasing may be a great option for you.
Leasing allows you to easily cycle through new cars without having to endure the hassle of selling your vehicle. Leasing allows you to stay within a manufacturer warranty. It allows you to have the latest automotive features. Monthly out of pocket costs are going to be lower as well. Taxes paid will be lower. The excess cash from the lower monthly payments could be used on investments to save you even more. For those looking for a car for short-term use, leasing is a very viable option.
Purchasing Benefits and Drawbacks
There’s something special about owning your own car. For those looking to get the absolute most bang for your buck, purchasing for long-term ownership is the way to go. If having the latest features isn’t very important to you, purchasing is the way to go. After you’ve paid off your loan, you’re done with car payments. The long-term costs associated with buying cannot be beat by leasing.
Other benefits of ownership include unrestricted mileage, modifications, and the freedom to sell at any time. If you’re the indecisive type, or don’t want to worry about the amount of miles you’re putting on your car, purchasing is a great option for you.
Purchasing is by far the most popular choice among the two. Ownership is an important part of our culture, and social stigmas surrounding automotive leasing limit us from doing what’s best for ourselves. When it comes to getting a new car, choosing whether to lease or buy comes down to the individual.
The Bottom Line
Both options are viable. The decision to lease or buy narrows down to you at an individual level. What are your realistic intentions for the vehicle? Do you intend to keep it forever and run it into the ground? If that’s your intent, buying is probably the more financially sound option for you. If you’d like to have the latest features, are more interested in short-term ownership, or are more interested in lower monthly payments, leasing is probably for you. If you need help deciding which option is the best for you, see us today in the Twin Cities near Minneapolis, MN and St. Paul, MN. We’ll be happy to assess your situation and figure out which option will suit you best.