Leasing vs. Buying Your Next Vehicle

Is it time for you to get a new car or truck? Getting a new vehicle can be exciting, but have you considered how you will pay for it? If you have not saved enough cash to buy the vehicle outright, you must decide whether to lease it or buy it. Both are valid financing options. While leasing could offer more affordable monthly payments, the cost savings may not be enough to justify the downsides of leasing, thus making purchasing a car the better choice. Deciding whether to lease or buy is based on three primary factors:

· the number of miles you expect to drive

· the amount of money you are willing to spend

· the purpose of your vehicle

Buying offers fewer restrictions on how much you can drive and what you can do with the vehicle – and you will own the vehicle at the end of the loan. But leasing is a less expensive option month-to-month - especially if you want to drive a luxury car.

How Does Leasing Work?

Leasing offers the right to drive a vehicle for a fixed period of time, usually 3 or 4 years. Most leases are financed through the auto dealer - and require paying sales tax, title fees, licensing fees, dealer documentation fees, and prep charges at signing. In some case, you must also make a down payment. The lease may also include an acquisition fee which can be as high as several thousand dollars. Once the lease begins, you make monthly payments over the life of the lease to cover the costs of the vehicle’s depreciation.

Most leases restrict the number of miles you can drive during the lease term. Be prepared to be charged for any excessive scratches, door dings, dents, interior stains, upholstery rips or damage from accidents. Consider repairing the damage on your own before returning the car as it will likely be less costly than the leasing company’s charges for the same repairs.

Benefits of Leasing

Leasing can result in significant cost savings:

· Leasing a newer car tends to cost less month-to-month than buying one, and in some cases, you may not have to put any money down.

· You will likely enjoy the benefit of manufacturer warranty protection, which typically lasts for the first three years or 36,000 miles.

· You will drive the leased car during its most trouble-free years, and the lease may include free oil changes and other scheduled maintenance.

· You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford with the latest active safety features.

· You will not have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.

· There could be significant tax advantages for business owners or for leasing an electric car.

· At the end, you just drop off the car at the dealer.

Drawbacks of Leasing

Be aware that leases come with restrictions and other drawbacks:

· Most leases have annual mileage restrictions, typically ranging between 10,000 to 15,000 miles. If you exceed those limits, you pay a premium — typically between 10 to 50 cents per mile. You do not get a credit for unused miles.

· You are responsible for expendable items such as tires which can be more expensive to replace on a better-equipped vehicle with premium wheels.

· There are fees for any wear and tear considered “excessive,” which can include anything beyond small scratches and dings, and you may have to pay a fee when you turn in the vehicle at the end of the lease.

· Terminating a lease early is expensive. Check to see if you will be able to transfer the lease if necessary. If you decide that you don’t like the car or cannot afford the payments, you will likely be stuck with early termination fees and penalties if you get out of a lease early—and they are all due at once. Those charges could equal the amount of the lease for its entire term. · Unless you choose a lease buyout, your monthly payments will continue when you either renew your lease or lease a new vehicle. So, you are never without payments and never fully own the car.

Buying a car

Purchasing a vehicle means you maintain possession of your car instead of leasing it for just a few years. However, brand-new cars have high price tags. According the Kelley Blue Book, the average cost of buying a new vehicle in June 2022 was over $48,000! Other more affordable options include buying certified pre-owned vehicles (CPO) and used cars. For new cars purchased with a loan, the monthly payments are typically higher than leasing, but you will own the vehicle when the loan is paid off in full.

Benefits of Buying

In addition to building equity in a valuable asset, buying offers other benefits:

· When you buy a car, you won’t have to keep an eye on your mileage. If you want to rack up 100,000 miles in a year, you can do so without worrying about extra fees.

· You won’t have to worry about what a dealer deems normal wear and tear.

· Because the car is yours, you won’t need to think about what to do when your auto loan is paid in full. When you’re ready for a new vehicle, trade in or sell your car at its current market value based on mileage and condition.

Drawbacks of Buying

Car ownership isn’t without its downsides.

· The average monthly payment in 2024 for buying a Honda Civic was $476. This is $113 more per month than a lease payment for the same car, according to Experian’s State of the Automotive Finance Market report for Q2 2024.

· You can reduce the amount to borrow and your monthly payments if you make a higher down payment, But, this requires investing more of your savings.

· Longer term loans offer a lower monthly payment, but such loans can be risky. You may end up “upside down” where you owe more than the vehicle is worth. If you must sell the car early, or if it is destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.

· Buying a car with a loan is not the best option if you prefer to drive a new car every couple of years. Taking out long-term loans and trading in early creates much higher finance charges compared with principal.

· When you own your car, you must pay 100% of the cost to repair it. The warranty may cover some items, but you will be fully responsible for repairs once the warranty expires.

Leasing is best for…

If you need a vehicle without making a substantial upfront financial commitment, leasing is more affordable on a monthly basis the first few years. A lease allows you to drive a more luxurious vehicle than you might otherwise be able to afford. But the mileage restrictions and potential excess wear-and-tear charges may not work for you, especially if you do a lot of long distance driving.

Buying is best for…

Buying might be best for you if you like to be in total control of your car and your finances. Buying eliminates worries about mileage restrictions and potential charges for excess wear and tear on your vehicle. While financing may require extra research, you will have full control of your vehicle. You can sell or trade it in at any time which is not an option, which is not offered through a lease. Over the long term, the cheapest way to drive is to buy a car and keep it until it is uneconomical to repair. Leasing usually costs more than an equivalent loan because you’re paying for the car during the time when it is most rapidly depreciating.

Other considerations

· Use a calculator to determine whether leasing or buying is better for your budget.

· Maintain a good credit score. Your credit score is the primary measure of your ability to borrow and/or lease. If leasing, aim for a score between 680 and 740. If buying, aim for a score 660 or higher.

· Per the Experian State of the Market report:

o The average lease payment for subprime borrowers, or individuals with credit scores between 501 and 600, was $597, compared to $586 for super prime borrowers with credit scores between 781 and 850.

o The average monthly payment for used auto loans was $536 for subprime borrowers and $522 for super prime. Consumers who financed new cars paid $749 and $717 per month, respectively.

· Consider the timing of when to buy. Holidays or colder months may offer a better sale price.

In Summary

Making the lease vs. buy decision depends on a careful assessment of your finances and driving habits. How much can you comfortably afford to pay upfront each month? How many miles do you

spend on the road each month and each year? This will help determine the most cost-effective way to pay for your vehicle. Crunch the numbers with a lease versus buy calculator once you determine the type of vehicle you want. Shop around for financing options and compare rates for leasing and borrowing before making your final decision.

If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.