Leasing a car is increasingly popular nowadays. It gives you a new car for a relatively low monthly payment. Are you making the leasing versus buying decision? Here are the pros and cons of leasing vs. buying a car.
There are many choices made each day. Easy decisions like what to eat for breakfast and what route we take to work. Other choices can be harder, especially financial decisions.
Making financial decisions largely depend on the money goals we set for ourselves. If you want to save X% of your income per year, you need to make decisions that align with that.
There are times when you want something else based on preference. You want the fancy car that makes that cool sound when you drive. It is not solely a financial decision, it is also based on your preference.
I’m going to be straight with you: in the leasing vs buying discussion, many want to lease a car. However, buying a car is the best financial decision for most people.
We will dive into the article to find out whether or not you are most people.
Which is better: Leasing vs Buying a car?
I will be short about this one: leasing is when you get a new car for a relatively low monthly payment. It feels nice to have a new car, you feel like you’re paying less, but you don’t own the car at the end of the day.
When buying, you pay for the car that you are eventually going to own. It is preferably second-hand because it will experience less depreciation in that way.
In Rich Dad Poor Dad we learned something important: anything that takes money out of your pocket is a liability, not an asset.
Warren Buffett still lives in the same house they bought 30 years ago and he doesn’t spend much money on cars either. The value of a car will only decrease over time, so why see it as an asset?
This means we can conclude that a car is a liability. It is something you use and when you use it, the value will decrease.
Pros Of Leasing
Lower Monthly Payment
Leasing is tempting to many people, mainly because of the lower monthly payment.
When I say lower monthly payment, I mean lower monthly payment compared to buying the same car new.
The fact is that cars depreciate immensely the first few years of driving them around. In the first year, they generally lose 20-30% of their value. After the first five years, the rule of thumb is that they lose 60% or more of their original value.
That’s a lot!
If you lease that means you can drive them around for the period of the lease (3-5 years) and get a new car again after the lease is finished.
When you’re buying a new car, the value is dropping significantly in the first few years.
Drive A New Car
You may love to drive around in a new car. Leasing can be a big perk for you, because you always get to drive around in new cars.
It is more of an emotional state of mind, which is very important to some. If you really love cars, this can be a major advantage and pro of leasing a car.
Drive A Nicer Car
You don’t just drive a new car, you can drive a nicer car. Many people are driving around in Teslas and Range Rovers nowadays, of which around 75% are leased cars.
That makes perfect sense.
Most people can’t afford the costs of that nicer car, meaning that they will need to take a lease. The monthly payment is lower than if you bought the car new, only thing is that you need to hand it in after the lease ends (3-5 years).
No Costs Upfront
When you’re leasing a car, there is little to no upfront costs.
Most lease contracts don’t have a down payment if they do the amount is very low.
Simply because you’re driving a new car all the time, you have to deal with less maintenance.
The vehicle does not age and thus you don’t need to worry too much about these kinds of things.
Cons Of Leasing A Car
While there are positives about leasing a car, there are also negatives. Let’s go into them right now.
It Is Not Yours
While you can drive around in it, it is technically not your car. You’re paying the monthly rent and maintenance for the car, that is it.
Responsible For Repairs
When you lease a car, it is not yours. You probably know that by now.
However, when there are repairs that are not falling within your agreement, you need to finance them. While this may be logical, it can turn into a downside when you are having to pay for the monthly lease plus any repairs that you make on the car.
When the car is turned in, there is no additional money paid out to you if the car is worth more because of the repair or other changes you made to the car.
Pay Extra For Damages
You know when you have a car and there is a little scratch on your door? You can decide for yourself if you want to get that fixed or not.
When you’re leasing a car and there are damages to the car, you need to pay for them. Whether the damage is inside the car or on the outside, is irrelevant.
In my opinion, this is a big con. Especially if you’re driving a lot for your work or you live far from the office.
Lease agreements always have the agreement that you can drive the car for X amount of years or X amount of mileage. For example, you can drive the car for 5 years or 60,000 miles (96,000 kilometers).
If you go over that mileage, you need to pay for every mile over the agreed mileage. This can be a huge pain because you need to think beforehand about what you think you’re going to use. If you don’t, you have to pay up big time.
If your situation changes and you’re suddenly moving closer to work, that doesn’t mean that you can some kind of refund for the miles you didn’t use. That’s not how it works, unfortunately.
Liability For Payments
When you’re encountering a major life event and you’re not able to pay for the car anymore, the lease contract is still in place.
The leasing company will reclaim the car and sell it. When the amount that they get is less than the amount outstanding in the agreement you made, you need to still pay the difference.
Conclusion – Leasing Vs. Buying A Car
Wealthy people pour their money into assets that increase in value over time, like stocks and real estate.
Cars are not assets and billionaires like Warren Buffett or Alice Walton rather drive around in cars until they really need replacement.
That doesn’t mean that you can’t drive a nice car if that is something you value.
Lease a car is for you if you love sitting in a new car every couple of years and that is worth it for you. Just know that you will probably spend more than necessary.
Like everything in personal finance, there are pros and cons. Think about what you value and your current financial situation before you’re making a decision.
What are your thoughts on leasing a car?
Like the post? Save for later!
Marjolein is a financial consultant who has built over €4,000 monthly passive income and saves over 70% of her income. Read Radicals’ inspiring story, from stuck in the 9-to-5 to loving life. Feel free to send Radical a message at the bottom of this page