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Your next car: Buy or lease?

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January 2nd, 2018
Sign with the words "buying" and "leasing."

Sign with the words "buying" and "leasing."

Are you in the market for a new car and wondering whether you should buy or lease it? Some people have strong opinions on which option is a better deal, but there are definitely pros and cons to both buying and leasing. 

One of the most significant advantages to buying a car is that once you pay it off, you still have something of value: either a car you can drive without making payments or one that you can trade in to reduce the cost of a new vehicle. Plus, you’ll typically pay a lower interest rate if you buy as opposed to leasing. 

“Buying a new car and financing the purchase beats leasing for retirees unless you plan to trade in your car after a few years,” says Oregon financial planner David Walters (palisadeshudson.com). “The longer you own your car, the more you’ll save buying versus leasing.”

Leasing a car can seem appealing because the payments are typically lower. But lessees should read the fine print to make sure they don’t incur fees that can significantly increase the cost of driving a leased car. If you need to end the lease early (perhaps because you decide it’s no longer safe for you to drive), you could be charged a hefty early-termination fee. 

“Look very closely at the fine print in a prospective car lease to see how many miles you are allowed to drive per year,” says financial planner Joel Ohman, who is the founder of CarInsuranceComparison.com. “Low-mileage leases may be cheaper up-front, but unless you truly do not put that many miles on the vehicle, then you will likely end up with a hefty fee due at the end of the year for overages.”

It all depends

All that said, there are scenarios where leasing makes good financial sense. If you use your vehicle for business purposes, you may be able to write off the cost of lease payments on your taxes. And buying a car typically requires a bigger down payment and higher monthly payments than leasing—which means you’re tying up more of your cash.

“If you’ll definitely want a new car in a few years, you may end up paying enough in finance charges that leasing is the more logical option,” says Walters.

There are also lifestyle considerations that can make leasing attractive for retirees. When you own your car, you’re on the hook for potentially pricy repairs, which can be difficult if you have a fixed income. But when you lease, most repairs and some routine maintenance are covered. 

If driving brand-new vehicles with the latest technology and safety features is important to you, leasing may enable you to drive a higher-end car for less money a month. According to the Lexus payment estimator tool (lexusfinancial.com), it would cost $898 a month for 60 months to buy a 2017 GS Turbo. But lease payments on the same car would be $771 a month for a five-year lease. 

“Match your decision to your needs, finances, and lifestyle to minimize the cost of owning cars over the long term,” Walters says.

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