Should you buy or lease a vehicle?
TAMPA, Fla. - Tesla CEO Elon Musk made headlines when he made the bold claim you could lease a brand new Tesla Model S for less than $500 per month. While there's definitely some clever marketing and incentive-based tax credits to get to that $500 a month payment, the messaging behind leasing a car versus buying a car is nothing new.
You can do a quick search online and find hundreds if not thousands of different advertisements making the bold claim of driving a brand new vehicle for as little as $129 per month, all with a simple lease.
If you are in the market for a new ride, here's what you need to know whether it makes financial sense to lease or buy a new car.
Benefits of leasing a vehicle
If you are considering leasing a vehicle, here are some of the benefits that will be most appealing.
Lower monthly payments: Leasing a car is typically going to be much lower than purchasing a car, but please keep in mind that you do have to put down a down payment. This down payment can be anywhere from a couple of thousand on up to $5,000 to $7,000, depending on the type of vehicle that you are considering taking out a lease on, but there is no additional upfront sales tax.
Never upside down: Most people are aware that purchasing a brand-new car will give you an asset that drops 20% immediately after driving it off the lot. If you don't put a lot of money down on that new car, then after owning it for a few years, you could end up owning a vehicle that you owe more than what it's actually worth. This is what's called being upside down on the loan. With a lease, this will never be a concern because you only pay for the depreciation of the car during your lease term.
The new car smell never goes away: Stepping in a brand-new car for the very first time is a memorable event for those that have experienced it. There's nothing like the smell of a brand-new car. With leasing a car, this is an experience that typically doesn't go away because you'll be trading in your car every three years. In addition to the new car smell, you also get the benefits of the latest technology, including safety features that can be very important to families with young kids.
Don't worry about selling: Trying to unload a used car can be a hassle. Whether you're trying to sell it to a third party or possibly a trade in at a local dealership, it's an experience that many would rather avoid. With the lease, you never have to worry about selling a car since you'll be trading it in at the end of your lease.
Benefits of buying a vehicle
Pay less overall: As we discussed before, leasing a vehicle would typically get you a lower monthly payment, but over the long-term, buying a car outright will save you less. Barring any major vehicle repairs, the longer you drive your car, the less it costs.
Having the option to sell: I get that selling a car can be a hassle and it's definitely not the most enjoyable experience, but buying a car does give you that option to own an asset that is worth some value. By doing some research on Kelley Blue Book, it doesn't take long to find out how much your car is worth.
Tracking miles not required: For those that have leased a vehicle, you know what it's like when you're planning an upcoming road trip. No one wants to go over the mileage limit that leases require of you. Those mileage limits can be anywhere from 12,000 to 13,000 miles per year, and if you go over that, it can prove to be a costly expense. If it's your car, then there is no limit on any road trip that you want to take.
What about car insurance?
Another consideration on purchasing a car versus leasing is how much your auto insurance is going to cost. If you decide the lease option, there is a possibility that your auto insurance could cost more. This is based on the required types of coverage that you need for certain types of leases.
Since you don't own the vehicle and it's still owned by the dealership, they may require that their property is properly insured. The two types of car insurance that may be required of you are gap insurance, which is protection in case the car is completely totaled in an accident; and comprehensive and collision insurance, which is an add-on coverage to the basic liability insurance that most states require.
It all comes down to how risky the driver is. They’ll look at your driving record and if you have any accidents or speeding tickets. Younger adults may also have additional challenges of leasing a car.
You have to be at least 18 years old to lease a car, but leasing companies may have stronger restrictions. And since auto insurance for young adults is typically more, young adults may not gain the same type of monthly savings than someone else that is older.
Final verdict: Should you lease or buy?
While I'm sure there are certain situations where leasing a vehicle might make good financial sense, from my standpoint, buying a car is always going to be your best bet -- but there is one caveat.
My recommendation is to never buy a brand-new car. The average car payment for Americans is currently $568 a month, but a used car on average is just over $400 a month.
My family and I have always looked to purchase certified pre-owned vehicles, typically with one owner with less than 10,000 miles. By going this route, we have saved on average $10,000 to $20,000 off the sticker price, which then means we're paying that much less overall for the life of the loan.
If you're not sure on where to purchase a certified pre-owned vehicle, there are plenty of options online. One option that most people are not aware of are rental companies. Avis, for example, which is known for their strong rental fleet, also has a used car division named Avis Car Sales.
If one of the benefits of leasing a car was driving the newest car with the latest technology, purchasing a certified pre-owned vehicle from a rental company like Avis will give you many of those same features. But the key difference is that the vehicle is yours and you'll be paying a lot less than a used car and possibly even close to what you would pay on a lease.
Buying or leasing a car doesn't have to be a huge financial and emotional strain. There are plenty of financial calculators that can show you the monthly payment and also the total cost. Do your homework and buy smart.
Jeff Rose is a combat veteran, certified financial planner and founder of GoodFinancialCents.com