It’s more than the new-car scent. It’s the knowledge that virtually no one has driven it before you — aside from perhaps a short test drive or two. Yet new vehicles can be costly, putting them out of reach for many people.
Buying a used car is one route, but another way to get behind the wheel of a new ride without purchasing it outright is to lease.
The 2022 Reality of Car Shopping
The pandemic has disrupted the usual car-shopping landscape, mostly because new-car inventory is scarce. A global chip shortage combined with production slowdowns during the pandemic have seriously cut supply.
Through 2021 and into 2022, experts advise buyers to expect to pay near sticker price, so delaying a purchase if you can is wise. Kelley Blue Book reports the average new vehicle cost $46,404 in January 2022 — up 13.6% from January 2021. That increase reflects both consumers favoring SUVs and trucks and dealers feeling less pressure to offer discounts.
Besides higher prices, you’ll likely wait longer to receive your chosen car. Whether you lease or buy, expect delays of three to six months because demand is high and supply is low.
More often than not, you’ll be ordering a vehicle to be custom-built rather than picking one off the lot. J.D. Power notes that the average vehicle sits at a dealership for 26 days before sale today, compared with 62 days before the pandemic.
If your household is thinking about reducing to one car, now might be a favorable time. Dealers are eager for used vehicles and are offering attractive prices. If you’re currently leasing, a dealer might propose an early lease buyout. Those can be appealing options if you don’t immediately need another vehicle.
Leasing vs. Buying a Car: What’s the Difference?
Pandemic aside, both buying and leasing have advantages and drawbacks, and the right choice depends on numerous factors. Read on to understand the distinctions between leasing and buying so you can decide which fits your situation.
What Is Leasing?
Leasing a new car means you’re renting it from the dealership for a set period. The dealer keeps ownership while you pay a monthly fee for its use.
Because lease payments are calculated based on the vehicle’s depreciation rather than its full price, lease payments are often lower than loan payments for a purchased vehicle.
At the end of the lease term, you’ll either return the car and start a new lease on another vehicle, or you can opt to purchase the car from the dealer by paying its residual value. Many lease contracts specify the buyout price if you decide to purchase.
In the current market, buying your leased vehicle at term could be advantageous. The buyout price is set by the car’s residual value when you signed the lease.
If you leased before or during the early pandemic, chances are the car’s residual value is now higher than it was then, potentially giving you a great deal on an almost-new vehicle. Low mileage from remote work could make that deal even better.
The downside is that if you want to turn in your lease and start a new one, finding another new lease vehicle might be difficult.
Like buying, lease terms are negotiable. Here are some strategies for negotiating a lease effectively.
What Is Buying?
When you buy a car, ownership transfers from the dealer to you if you pay in cash or to your lender if you finance the purchase. That makes the car yours to use however you like, whether that means long road trips or customizing its looks and performance.
Pros of Leasing a Car
Lower Monthly Payments
Lease payments are typically much smaller than loan payments. That’s because you’re paying for the vehicle’s depreciation over the lease term rather than its full value, which reduces your monthly cost.
Smaller Down Payment
Generally, upfront costs for leases are lower than for financed purchases. Depending on the dealer and your credit, you may even find lease offers that require no money due at signing.
Better Options
With lower monthly payments, you can often afford to lease a nicer or more luxurious vehicle than you could buy. That lets you access the latest tech and premium amenities — like leather seating — that buying might put out of reach.
Warranty Coverage
Most new cars include warranties that cover the first few years, which typically align with common lease terms. If something fails during the lease, repairs are usually covered. Some leases also include fully paid maintenance for the lease duration.
Easy Turn-In
When you own a car, trading it in or selling privately can be a hassle. At lease end, you simply return the vehicle and select a new one — though given current supply issues, it’s smart to begin the process about six months before your lease expires to secure replacement transportation.
Cons of Leasing a Car
Limited Options for Bad Credit
If your credit score is low, finding a leasing company or dealer willing to lease to you can be difficult. If you do qualify, expect higher upfront costs and larger monthly payments.
Zero Equity
Although you make monthly payments on a lease, that money doesn’t build equity in the car. When you return it, you won’t have any trade-in value to apply toward a new vehicle. Many leases require money down, which is extra cash you’ll need if you don’t have a car to trade.
No Room for Customization
As a lessee, making permanent modifications isn’t permitted. If you want to personalize your vehicle, leasing isn’t ideal. Any changes must be reversible to avoid steep charges at lease end.
Mileage Limits
Leases set a maximum mileage allowance. If you exceed that cap, you’ll owe an excess mileage charge per mile. The cap and fee vary by the vehicle and the lessor.
Before you sign, calculate your average driving so you can choose a realistic mileage limit.
End-Of-Lease Fees
Ending a lease early can carry termination fees. If you’re certain you’ll keep the vehicle for the contract length, this won’t be a major worry, but unexpected life changes (like job loss) could make early termination costly.
Dealers often contact lessees up to three months before lease expiration to retain business. If you trade in the car for another lease then, you generally won’t face an early-termination fee.
When you return the vehicle, the dealer will perform a thorough inspection or you can arrange one independently. They’ll share the findings with you.
The car should be in good condition with only normal wear; excessive wear and tear will result in additional charges. That includes maintaining a clean interior and avoiding exterior damage.
Pros of Buying a Car
The Car Is Yours
When you purchase outright or finance a vehicle, it’s yours to modify and use as you wish. That means bumper stickers, aftermarket upgrades or even a bold new paint job are all on the table. Plus, when you’re ready for a different car, you can trade in or sell your vehicle and use the proceeds as a down payment.
No Mileage Limits
If you frequently drive for work or enjoy long trips, buying is likely the smarter choice. With a lease, you risk exceeding the mileage cap and paying more later.
Car Payments Have an End Date
Most buyers finance their cars and make monthly payments until the loan is paid off. Once you’ve cleared the loan, you’ll no longer have that monthly payment, freeing up money for savings or other priorities.
Bad Credit Is Less of an Issue
Generally, buyers with subprime credit have more financing options available than lessees do. You may still face higher interest rates, but lending alternatives are often more plentiful.
Cons of Buying a Car
Higher Short-Term Expense
Although the car will be yours in the long run, buying often costs more in the short term. Monthly payments tend to be higher than lease payments because you’re financing the vehicle’s full price, not just its depreciation. You may also need a larger down payment when purchasing.
Higher Taxes and Interest
When you buy, you’ll pay sales tax on the vehicle’s full purchase price, which can add significantly to the cost. You’ll also pay interest on the financed amount. With a lease, taxes typically apply only to the down payment and monthly payments, and interest is charged only on the depreciation.
Your Warranty Will Run Out
New-car warranties cover a limited period. After that, repair costs fall to you unless you purchase an extended warranty, which raises the upfront cost and may force a choice between added coverage and a less expensive vehicle.
When comparing leasing vs. buying, consider your personal needs and finances so you can pick the option that makes the most sense for you and your household.
