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Have you been daydreaming about cruising the highway in a shiny new ride—and finally ditching that decade-old clunker on its last legs?
Before you’re persuaded by the salesperson into signing on the dotted line for a souped-up SUV or sporty hatchback, it’s important to take a step back to determine how owning versus leasing will impact your finances.
After all, the decision could save (or cost) you thousands of dollars over time, depending on the terms of your lease or loan—as well as how long you intend to keep your new wheels.
To help you decide, we’ve tapped a financial planner and a leading car expert to lay out the key benefits of both options—and offer up some general guidelines so that you make the right decision based on your budget, lifestyle and financial goals.
When Does It Make Sense to Lease? One of the big reasons people may choose to lease is immediate affordability, says Matt Shapiro, a CFP with LearnVest Planning Services.
For starters, most leases require a small down payment—or none at all.
And the monthly fixed costs are often much lower for a leased car than a financed one, Shapiro says. Since you’re essentially renting a leased car, you’re only covering the cost of its depreciation and some interest—not the car’s full value, which you’d be paying for if you’d bought it.
Plus, the short-term commitment—most lease terms are two to three years—can be appealing for certain types of consumers.
For example, maybe you’re someone who enjoys driving the latest models and you don’t want to deal with the hassle—and potential loss—of selling a car every few years. Or perhaps your family is growing, which means you’d likely need a roomier ride in the near future.
And those who need to drive newer vehicles for their profession—such as real estate agents—might prefer to lease if they can write off the expense as a business-related tax deduction.
Oren Weintraub, founder of Authority Auto, a car-buying consulting agency, adds that some people just find a lease brings more peace of mind. “You’re always under warranty, you’re always getting the latest safety and technology, and your maintenance costs over the term are lower,” he explains.
When Does It Make Sense to Buy? From a purely financial perspective, “the ideal scenario would be to save up, buy with cash and own outright,” Shapiro says.
But few people are in a position to shell out five figures all at once, so the majority of Americans need to finance a new ride.
And that isn’t necessarily a bad thing—buying is often a bigger bargain if you want to keep your car for the long haul.
“If you’re going to keep a car for three years or longer, your total amount spent will be less than if you leased and bought the car in the end,” Weintraub says. “Payments will be higher upfront, but after the three-and-a-half year mark, you [generally] have equity [in the car].”
And Shapiro agrees having equity is a plus. “There are some big upsides to financing—every payment increases your net worth. You’re building equity in an asset, and even if it’s a depreciating asset, it’s still a thing you own.”
Plus, once you own the car outright, you won’t be tied to a payment, as with a lease.
And here’s a bonus: Your insurance costs will likely be lower if you buy, Shapiro adds, and you won’t have to worry about fine print that might up your costs like steep penalties for racking up mileage beyond a designated maximum.
The Big Takeaway If you plan to drive your car for more than three years, financing the purchase will likely cost you less than a lease in the long run.
Regardless of which route you choose, Shapiro recommends limiting your monthly payment to no more than 10% of your take-home pay to help ensure you’re not taking on more car than you can afford.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.
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