IS IT BETTER TO LEASE A CAR OR BUY A CAR?

When it comes to acquiring a new vehicle, one of the key decisions you need to make is whether to lease or buy. Each option has its own advantages and disadvantages, and the choice ultimately depends on your personal preferences, financial situation, and lifestyle. In this guide, we will explore the pros and cons of leasing and buying a car, helping you make an informed decision based on your individual needs and goals.

LEASING A CAR

Leasing a car involves entering into a contract with a financial institution to use a vehicle for a specified period, typically ranging from three to four years. During this time, you make monthly payments to cover the vehicle's depreciation. Leasing offers several benefits that may make it an attractive option for certain individuals.

Benefits of Leasing a Car

1. Lower Monthly Payments: One of the primary advantages of leasing is that it often results in lower monthly payments compared to buying. When you lease a car, you are essentially paying for the vehicle's depreciation during the lease term, rather than the full purchase price.
2. More Affordable Luxury: Leasing allows you to drive a more luxurious vehicle than you might be able to afford if you were to purchase it outright. This can be particularly appealing if you enjoy having access to the latest technology, safety features, and high-end amenities.
3. Warranty Protection: Most lease agreements coincide with the vehicle's manufacturer warranty, providing you with peace of mind in case of any unexpected repairs or maintenance. This can help minimize out-of-pocket expenses during the lease term.

Drawbacks of Leasing a Car

1. Mileage Restrictions: Most lease agreements come with mileage restrictions, typically ranging from 10,000 to 15,000 miles per year. If you exceed these limits, you may be subject to additional charges, usually around 30 cents per mile. For individuals who frequently travel long distances, leasing may not be the most suitable option.
2. Excess Wear and Tear Charges: When you lease a car, you are responsible for maintaining its condition. If the vehicle exhibits excessive wear and tear beyond normal use, you may be charged for repairs or restoration at the end of the lease term. It's important to carefully review the lease agreement to understand what is considered normal wear and tear.
3. Limited Flexibility: Leasing a car involves committing to a fixed term, and terminating the lease early can be costly. While some lease agreements offer the option to transfer the lease to another individual, this may not always be feasible. If you prefer the freedom to sell or modify your vehicle at any time, buying may be a better choice.
4. Insurance Coverage Limits: Leasing a car typically requires more than the minimum auto insurance mandated by your state. Here's a breakdown of the coverage you'll likely need:
   1. Minimum State Required Liability: This covers injuries and property damage you cause to others in an accident. It's important to note that the leasing company might require higher liability limits than your state minimums. They may ask for coverage amounts like $100,000 per person and $300,000 per accident for bodily injury, and $50,000 for property damage.
   2. Collision Coverage: This pays to repair your leased car if you're at fault in an accident or hit another object. Since you don't own the leased car, the leasing company requires this coverage to protect their financial interest in the vehicle.
   3. Comprehensive Coverage: This protects your leased car from damage caused by theft, vandalism, fire, weather events, and other incidents not involving a collision. Similar to collision coverage, it safeguards the leasing company's investment.
   4. In some cases, the leasing company might offer these coverages as part of their lease agreement, but it's usually cheaper to get them through your own auto insurance provider. You might also consider:
   5. Gap Coverage: This optional coverage fills the gap between the actual cash value of your car (what your insurance company pays out in case of a total loss) and the amount owed on the lease.

Remember, these are general guidelines. Always check with your specific leasing company to understand their exact insurance requirements.

BUYING A CAR

Buying a car involves purchasing the vehicle outright or financing it through a loan. Unlike leasing, buying a car gives you full ownership and control over the vehicle. While it may involve higher monthly payments and upfront costs, buying offers several advantages that may align with your preferences and long-term goals.

Benefits of Buying a Car

1. No Mileage Restrictions: When you buy a car, you are not limited by mileage restrictions. You have the freedom to drive as much as you want without incurring any additional charges. This can be particularly advantageous for individuals who frequently travel long distances or have a lengthy daily commute.
2. Ownership and Equity: Buying a car allows you to build equity in the vehicle over time. As you make monthly payments, you are gradually paying off the loan and increasing your ownership stake. Once the loan is fully paid, you own the vehicle outright and can sell or trade it at any time.
3. No Restrictions on Modifications: When you own a car, you have the flexibility to customize and modify it to suit your preferences. Whether it's upgrading the sound system, adding aftermarket accessories, or changing the appearance, owning a car gives you the freedom to personalize it according to your taste.

Drawbacks of Buying a Car

1. Higher Monthly Payments: Buying a car typically involves higher monthly payments compared to leasing. This is because you are financing the full purchase price of the vehicle, rather than just the depreciation. However, it's important to consider the long-term financial benefits of ownership and equity accumulation.
2. Depreciation: Cars are known to depreciate in value over time. When you buy a car, you are responsible for absorbing the depreciation, which can result in a loss of value. However, this depreciation can be mitigated by choosing a reliable vehicle with a strong resale value.
3. Maintenance and Repair Costs: As the owner of a car, you are responsible for all maintenance and repair costs. While some repairs may be covered under warranty, others will require out-of-pocket expenses. It's important to budget for these costs and consider factors such as reliability and manufacturer warranties when choosing a vehicle.
4. If you are financing the vehicle, then the financial institution may require insurance coverage the same as or similar to the coverage mentioned earlier.

Final Considerations

When deciding between leasing and buying a car, several factors should be taken into consideration.

1. Financial Situation: Consider your current financial situation, including your monthly budget, credit score, and ability to make a down payment. Leasing may be more suitable if you prefer lower monthly payments and minimal upfront costs, while buying may be a better fit if you have the financial means to make larger monthly payments or a substantial down payment.
2. Lifestyle and Driving Habits: Evaluate your lifestyle and driving habits. If you enjoy having access to the latest models and technology, and if you don't drive long distances, leasing may be a more appealing option. On the other hand, if you prefer the freedom to drive as much as you want without mileage restrictions and the ability to customize your vehicle, buying may be a better choice.
3. Long-Term Goals: Consider your long-term goals and how owning or leasing a car aligns with those objectives. If you value the idea of building equity and having the ability to sell or trade your vehicle at any time, buying may be the preferred option. However, if you enjoy the convenience of driving a new car every few years and prefer lower monthly payments, leasing may be more suitable.

If you are considering buying or leasing a car, you can use one of our financial calculators to determine your potential vehicle payment.

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In conclusion, the decision to lease or buy a car depends on your individual preferences, financial situation, and lifestyle. It's important to carefully evaluate the pros and cons of each option and consider your long-term goals. Consulting with a TruWealth advisor can provide valuable insights and help you develop a personalized financial plan to determine which option best meets your specific needs and objectives.

Contact TruWealth Advisors to help develop a personalized financial plan to determine which option best meets your personal financial goals.

Additional Resources

1. See our full collection of Auto Calculators: https://www.twadvisor.com/financial-calculators.

Disclosure
TruWealth Advisors, LLC is an SEC-registered investment advisor. Registration does not imply a certain level of skill or training. For more information, please contact TruWealth Advisors, LLC, or visit the SEC's website (https://adviserinfo.sec.gov/firm/summary/306876). This material is to be used for informational purposes only and should not be construed as tax, legal, or financial advice.