When shopping for a car, many of my client’s ask me to explain the difference between purchasing and leasing a car. Leasing has become quite popular recently as more and more consumers are looking for the best payment and to stay within their budget for a monthly car payment. Purchasing a car is easy but leasing a car can sound confusing if it is not explained properly.
Leasing A Car
I assume for the most part, most consumers know just about everything there is to know about purchasing a car. So, I will explain what it means to lease a car. The easiest way to explain it is to simply think of leasing a car like you think of leasing an apartment.
With an apartment, you lease the space for a year or so and you are responsible for damage. Using the same example, at the end of the lease, you can renew the lease or you can go to another apartment and start the process over again at another apartment complex. With leasing a car, it’s about the same thing. You drive the vehicle for a certain period of time, normally 24 – 36 months depending on the manufacturer. During this time, the driver is responsible for any vehicle damage, insurance, and mileage.
Mileage is the number one reason that most consumers stay away from leasing a car. Most manufacturers offer mileage limits of 10,000 – 20,000. The most common lease for non-luxury vehicles is 36-39 months and 12,000 Miles/Year for 3 years.
One common misunderstanding is that you CAN NOT go over mileage. You can go over your mileage per year or per month but as long as your mileage is not over the limit by the time your lease is up, then you will not pay an extra cost.
The reason that there is an extra cost for over mileage is because the original contract is set to have a certain mileage once the vehicle is returned. In most leases, the extra cost is 10 cents per mile that is over the limit of miles. Of course, some brands charge a lot more and over-mileage can become costly.
Read: “How To Finance A Car With A Previous Repossession”
Pros of Leasing
The best part about leasing a car is that at the end of the lease, you have the option of being done with the lease all together and you turn in your keys. You can also purchase the lease and normally the payment stays around the same.
This works for many consumers as some finance a car every 2-3 years and end up carrying over a negative balance over to the other car over and over. After some time, this becomes expensive as the best way of negative equity is time, money down, or both. With leasing, you also don’t have to worry about major maintenance like tires, brakes, or rotors in most cases. This is perfect for consumers that want to swap out cars every 3 years or so, drive average to slightly above average miles, and not to mention leasing normally gives a lower payment than a purchase.
Of course, leasing is a privilege and is only offered to those who qualify. I would have to say that a lease works favorably with an auto credit score of 640. Your auto score is only obtained from either getting your credit report pulled by a lender or dealership or by purchasing it for a low one time cost.
Purchasing A Car
I will keep this short as this is the most common way of acquiring a car. One thing to keep in mind is that you only own a car once you have the title to the car. Many consumers say that leasing will not work for them simply because they will now “own” the car. I laugh at this every time because if you miss 3-4 payments on a financed auto loan, you will find out who the real owner is.
Most consumers never finish paying off an auto loan and there is nothing wrong with that. Most manufacturers change body styles, equipment, technology, and incentives every year on different models. Because of this, consumers are eager to purchase the latest and greatest. There is nothing wrong with this but the consumer must understand that you can trade in a car anytime but there are times when it makes more sense to do so.
The “sweet spot” to trade in an open auto loan (current auto loan) can vary based on contract terms, miles, interest rate, vehicle condition, and etc. In most cases, most auto loans are in 72 months and if that’s the case, the best time can be around 36-60 months.
Of course, you can always trade out of the car before that but depending on your interest rate, you could be in a situation in which you are “upside down” meaning your car is worth less than what you owe. This can have you putting money down, downsizing in cars, or increasing your monthly payments. With leasing, you never have to worry about negative equity (upside down) unless you jump out of the lease early.
How Credit Affects Purchasing
An auto loan purchase is mainly based on your credit score as well. A credit report with few accounts will have you paying a higher interest rate and a report with too much activity may have you doing the same. The best way to handle this situation, is to simply get an update credit report and see for yourself. One thing that many consumers never consider is refinancing their car later down the line to get a better interest rate or lower payment overall.
You can get a lower rate by taking out an auto loan on a shorter term, but sometimes this will result in a higher payment since the bank is getting their money back faster. You can also get a joint applicant in which both your credit report and your joint applicant’s credit report is taken into consideration. Some manufacturers do offer low interest and first time car buyer programs but there are qualifications to be met as well.
I want to make sure all the information is given to my readers to educate them on their options and build confidence. Hopefully, you have a better understanding of the difference between buying and leasing a car.