When you're in the market for your first car, ads promising super-low monthly payments are hard to ignore.
Leasing a vehicle might sound budget-friendly compared to traditional auto financing, but a smart purchase always considers more than monthly payments. Make sure you consider ongoing expenses, including maintenance, insurance, fuel, and repairs, and factor these into your decision.
Weigh the pros and cons of leasing versus traditional financing before taking your next test drive:
Pros of Leasing
There are benefits to leasing your first car. Here are a few to consider.
Lower monthly payments. Unlike traditional auto financing, you're not paying down the principal balance of a loan. A lease payment typically includes the amount the vehicle is expected to depreciate during the leasing period, along with a monthly sales tax and finance charge. Depreciation is calculated using the annual rate at which the car loses value.
Low or no down payments. For the same reasons you can expect to make lower monthly payments, you may be able to secure a new lease with little or no money down.
You might be able to afford a higher-priced car even if you're working with a tight budget. A new-model leased vehicle that includes numerous upgrades could be within financial reach since the costs for getting into a lease are often lower than traditional auto financing.
Used-car leases are a thing. Most consumers are unaware that you can lease a used car if it meets certain requirements. Often referred to as certified pre-owned (CPO) vehicles, they are typically less than four years old and have low odometer mileage. A used-car lease can offer significant savings over new.
Short-term leasing periods. With leasing periods of less than three years, you can often avoid the mechanical issues you might experience with older-model vehicles. Even if you have car troubles, they're likely covered under the manufacturer's warranty.
Leasing perks, such as complimentary car washes and scheduled maintenance, might be part of your agreement.
Multiple end-of-lease options. At the end of the lease, you can either purchase the vehicle by paying the balance in one lump sum, return the vehicle to the dealer, or transition to another lease.
Cons of LeasingDespite the upsides of auto leasing, there are a few drawbacks. Remember the following points as you compare your financing options.
- You don't own the car. A lease is similar to renting a vehicle. The title is in the dealer's name, not yours. Monthly payments do not help build equity.
- Perpetual leasing cycles could result in seemingly never-ending car payments. If you transition into another lease, you may end up paying more for the leased vehicles without the benefit of car ownership. These funds could otherwise be used to reach your other financial goals.
- Mileage limitations keep you off the road. You'll have to be mindful of how much you drive due to mileage limits. A typical lease agreement requires the lessee to pay a mileage penalty for exceeding 12,000 miles a year.
- A few thousand miles over the annual limit could be costly. Some agreements charge as much as 50 cents for each additional mile. And, you don't get credit for unused miles. High-mileage leases might allow you more freedom but are more expensive than a standard lease.
- Over-mileage fees aren't the only surprise costs you could face at the end of the lease. If the car does not meet return condition requirements, you may have to pay excessive wear-and-tear charges.
- Early termination fees. Ending a lease early means you'll typically pay a hefty penalty. Some agreements will allow you to cancel the contract early only if you are purchasing the vehicle.
Pros of Traditional Auto Financing
Similar to auto leasing, traditional auto financing offers benefits for first-time car buyers.
No extra fees or charges. You're free from mileage, wear-and-tear, and modification restrictions associated with leased vehicles.
Fewer restrictions. You can trade-in or sell the vehicle whenever you want. You don't need to wait until the car loan is paid off.
Financing payments eventually end. After you make your final auto loan payment, you can use the extra money in your budget to achieve other financial goals. And, the longer you own the car after you pay it off, the lower your transportation costs.
Cons of Traditional Auto Financing
While you'll own the vehicle at the end of the financing period, you'll also own more responsibility along the way.
- Higher payments. Monthly loan payments are typically higher since you're paying down a principal balance and interest.
- Higher down payments. You might need to make a higher down payment when compared to leasing.
- Expired warranties. Depending on how long you own the vehicle after the warranty expires, you could be responsible for major repair costs.
- You'll own a depreciating asset. Washing your hands of the vehicle at the end of the financing period may take more time and fail to net the money you expect when you sell.
Want the Best of Both Worlds?
There's a way to take advantage of the benefits of both leasing and buying a car. Our Better Than a Lease product is a car lease-like program you can use to get yourself in a new or used car, truck, or SUV.
Unlike a lease, the title to the car is in your name, not the dealer's, and you'll have to option to sell, trade, or refinance anytime, or return the vehicle at loan maturity. If you're the kind of driver who likes to change vehicles every couple years, our Better Than a Lease product offers shorter loan terms than you'll find with regular leases. You also avoid paying a security deposit or acquisition fees, and there's no early payoff penalty. Learn more here.
Deciding between financing options can be tricky. Slow down and explore your purchasing options before you grab the keys to your new car.
Others are reading: