Updated on May 12, 2021
If you’re in the market for a new car- or new to you- car, you may be asking yourself a common question – is it better to buy or lease? Before making a decision, you’ll want to learn what each option entails and understand the pros and cons of both. But first, you need to determine how much you can afford to spend.
How Much Car Can You Afford?
Whether you buy or lease, one thing remains the same. You’ll have a set monthly payment for your auto loan or lease (unless you have the cash to purchase the car in full.) So, before you commit to either, it’s important to create a budget so that you know how much you can afford to spend on a car payment each month. Keep your budget top of mind when you’re shopping for a car. When thinking about total monthly car expenses, make sure you’re factoring in costs other than your car payment, such as insurance and regular maintenance.
How Do I Buy?
To buy a car, you’ll need to get approved for an auto loan. Your lender will set your interest rate and monthly payment amount. Whether or not you’re approved will often depend on many factors, including your credit score.
When you buy a car, each loan payment you make helps you gain equity in the car. Once you’ve paid off the loan in full, the car is yours to keep, trade in, or donate. You can also use your fully paid vehicle as collateral to obtain loans.
How Do I Lease?
To lease a car, you’ll also need to get approved and will be required to pay a set monthly payment. However, lease payments aren’t paying toward the full value of the car – they’re paying down depreciation. Depreciation is the difference between the value of the car when you drive it off the lot and the residual value (or what it’s expected to be worth) when your lease is up.
Since you’re not paying toward the full value of the car, lease payments on a car tend to be lower than a loan payment on the same car. Because of this, many people can lease a fancier car than they can afford to buy. This can be appealing, but remember that in the end, you don’t get to keep the car.
Once the lease is up, you have to return the vehicle to the dealership unless you pay cash or take out a loan to purchase it. You’ll have to get a new lease if you want to take home a different car.
Understanding Restrictions and Requirements
Whether you buy or lease, there are likely restrictions and/or requirements you’ll have to follow.
For an auto loan, a lender may require you to have insurance on the car above the legal minimum. You may need to provide proof of insurance to the lender.
With an auto lease, there may be mileage restrictions, meaning that you’re only permitted to drive the car a certain amount of miles each year. If you go over this limit, you may have to pay a fee. You may also be subject to wear and tear fees if the condition of the car doesn’t meet the dealership’s standards when you return it.
Importance of Car Maintenance
Whether you buy or lease, car maintenance is important and can have a big impact on your wallet.
A lease may require you to follow a maintenance schedule. If you don’t follow this required schedule, you may have to pay a fee when you return the car.
While a lender doesn’t require you to follow a vehicle maintenance schedule, how well you care for the car will impact its performance, as well as its value if you decide to trade it in or sell it.
So, What’s Right for Me?
What’s right for you depends on these and other factors, such as your personal financial situation and your individual circumstances. If you decide buying is the best option for you, check out our guide to buying a new or used car and learn more about our competitive auto loan rates. If you lease and find that you’d like to keep the car, let us finance your buyout when your contract is up.
The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.