If you’re in the market for a new car, you may be asking yourself a common question – is it better to buy or lease?
How much car can you afford?
No matter what you decide, one thing remains the same. You’ll have a set monthly payment for your auto loan or lease unless you have the cash to pay 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.
Another way to determine how much car you can afford is to consider the 20/4/10 rule. This rule states that you should make at least a 20% down payment on a car, finance your vehicle for no more than four years, and keep your total monthly car expenses at less than 10% of your gross income. When thinking about total monthly car expenses, make sure you’re factoring in expenses other than your car payment, such as insurance.
The 20/4/10 rule doesn’t work for everyone, as many people need to take out a car loan for longer than four years in order to have manageable monthly payments. However, it’s a good reminder in general to keep your budget top of mind when you’re shopping for a car.
To buy a car, you’ll need to first 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.
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. Leases also tend to require a lower down payment. 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 it to the dealership unless you pay cash or take out a loan to purchase the car. Or 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 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 fit for you, check out our guide to buying a new or used car and learn more about our competitive auto loan rates.