Should I buy or should I lease a car?

September 09, 2018

If you've decided to get a car, you now need to think about how to pay for it. Most college students can't afford to buy a car outright—whether new or used. Your two most viable options are leasing a car, or buying and financing (AKA getting an auto loan).

Leasing

A car lease is like a long-term rental—typically for two to four years. Most leases are for new cars, though it's possible to lease a used vehicle. You'll usually pay a down payment and then make monthly payments. Your monthly payments are calculated by taking the difference between the value of the car before you lease it and the value afterwards—in other words, the depreciation—and splitting it up by the number of months you plan to lease (though the leasing company will charge a little more than the depreciation in order to turn a profit.) At the end of a lease, you'll have the option of a "lease buyout"—purchasing the car for its residual value.

Leasing restrictions

Because you don't own a car while you're leasing it, there are some restrictions on the car's usage. There is typically a mileage limit written into lease contracts, often around 15,000 miles per year, though this is negotiable. The dealership will charge you for exceeding this limit. You're restricted from modifying a leased vehicle, and you'll also pay more if it accrues excessive wear and tear. Another thing to consider is that it can be difficult and costly to break a lease contract.

Leasing might be the right option for you if you know you'll need a car for a few years, but after that you're not so sure.

Buying

Buying is another option to consider. There are many ways to purchase a car. If you buy used from an individual, you can typically get a car for cheap, however it's difficult to secure financing for a used car purchased privately, and if you can get a loan, the rates are higher. You can often secure financing for used cars sold by dealerships, however.

Used or new?

Another thing to consider is that when you buy used, you can't be totally confident about the car's condition (though having a mechanic inspect it can give you some assurance), and if you're unlucky you could end up shelling out lots of money in repairs. A more reliable option is to buy a certified pre-owned vehicle from a dealership. These can be more expensive than other used cars, but they come with a thorough inspection and stamp-of-approval from the manufacturer, and—to back up this assurance of quality—you can often buy new warranties for these cars. Buying new is the most expensive choice, but of course comes with the benefit of owning a car for its entire lifespan—as well as the new-car smell.

Financing

Dealerships will help you finance a car by working with a number of banks to secure you the best rate for an auto loan. You can also work separately with a bank or credit union of your choice to secure your own auto loan. Most auto loans can be paid back over 2–7 years, and annual interest rates range from 3.5% to 20%. Your interest rate will depend on your credit score, whether the car is new or used, and a number of other factors.

So should I buy or should I lease?

Buying is more expensive than leasing, but it comes with the distinct advantage of owning your vehicle, and having free reign over how you use it. This can pay off in the long term, as you can resell or trade in a used vehicle, or simply keep on driving it. Of course, owning a vehicle can also become a hassle as it accrues miles and mechanical problems.

With either option, the cost is negotiable. Whether you're leasing or buying from an individual or a dealership, it's important to understand that it's possible to get a lower price or a better contract with a little bargaining.

Buying vs Leasing a Car: Calculator

Red dotted lines indicate the end of the lease period or car loan.

Car ownership expenses

Outside of paying for the vehicle itself, there are a number of costs associated with owning or leasing a car. Make sure to take all of these into account as you budget for your car.

Insurance is a big cost. Minimum liability coverage is mandated by the state of California, and you'll probably want more coverage than this. The average car insurance premiums in California are $164/month. You can read more about auto insurance here.

You'll also need to factor in the cost of repairs and maintenance. These costs can vary widely and depend on the make of the car, the condition, and the degree of wear and tear. Even a brand new car will need regular oil changes, tire rotation, and maintenance check-ups. An older car may need major repairs that could range from hundreds to thousands of dollars.

Registration is another fee to take into account, and you'll have to pay it annually. Expect to pay $100-$200 per year, depending on the value of your car. The DMV provides a registration fee calculator on their website.

Of course, the one cost you can't forget is fuel. Unless you get an electric car, expect to be shelling out a good deal for gas money. How much will depend on your car's fuel efficiency and the number of miles you log. Spending more on a more fuel efficient car could save you money—and contribute less to carbon emissions—in the long-term.

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