There’s nothing like the feeling of driving a brand new car.
It’s more than the smell of a new car. It’s knowing that no one has ever ridden it – except maybe a test drive or two – before you. But a new car can be expensive, which makes it inaccessible to many drivers.
While buying a used car is one option, another way to get behind the wheel of a new vehicle without buying it outright is to sign a rental agreement.
The reality of buying a car in 2021
The pandemic has affected normal car purchase decision-making, and that’s largely because there is a shortage of new cars. The global shortage of microchips, as well as a slowdown in production during the height of the pandemic, have severely impacted inventory levels.
Experts say buyers should expect to pay the full sticker price by 2021 and likely 2022. So if you can wait to buy a car, do this. According to the Kelley Blue Book, the average new car was $ 39,833 in April 2021. That is almost 8% more than in 2019.
If your family is considering getting into a car, now may be the right time. Dealers are eager to sell used cars and pay the highest dollar. If you lease now, chances are the dealer may want to end your lease early by buying up the rest. These are good options when you don’t need a replacement car.
Leasing vs. Buying a Car: What’s the Difference?
Pandemic or no-pandemic, buying and leasing both have their pros and cons, and the right option for you depends on a variety of factors. Learn more about the difference between leasing and buying a car to find out which makes the most sense for you.
What is leasing?
When you lease a new car, you are essentially renting it from the dealership for a period of time. The dealer retains ownership of the car while you pay a monthly fee to drive it.
Because the monthly payments are based on the depreciation rate rather than the total value of the vehicle, lease payments are often lower than a finance payment when you take out a loan to buy a new car.
Once your lease expires, you can either return it to the dealership and start a new lease on another car, or you can buy the car from the dealership if you don’t want to return it. In this case, you will have to pay the residual value of the car. Often times, the leasing contract includes the price that you have to pay if you decide to buy the car.
Just like buying, you can negotiate a lease amount. Here are tips on how to do it Negotiating the lease successfully.
What is buying
When you buy a car, ownership passes to you either directly from the dealership (if you pay for the vehicle directly) or to the lender (if you take out a loan to finance the vehicle purchase). That means that the car is left to you to do what you want, whether you drive it regularly for long distances or change the appearance or performance of the car.
Advantages of leasing a car
Lower monthly payments
The rates for car leasing are usually much lower than the payments for a car loan. That’s because you only cover the depreciation of the car during the term of the lease, which translates into lower monthly costs.
In general, the down payments for leasing contracts are lower than for car financing. Depending on the dealership and your credit history, you might even be able to find a lease that doesn’t require any money when signed.
Since your payments are lower, you can usually afford to lease a higher quality vehicle than if you bought it. That means you can get the latest technology and premium features like leather seats with a lease that may be out of budget when purchased.
Most new cars come with warranties that cover at least the first three years, which is the average lease duration. If something goes wrong with the vehicle during the lease, repairs are likely covered by the warranty. Some leases may also offer fully paid maintenance for the duration of the lease.
When the time comes to trade in a car you own, you have to worry about finding a great deal or even worrying about private sales. At the end of the lease, if you want to buy a new vehicle, all you have to do is bring it back and choose a new vehicle.
Disadvantages of leasing a car
Limited options for bad credit
If you have a low credit score it can be difficult for you to find a leasing company or car dealership that is willing to enter into a lease with you. Even if you can find a lease, you will likely have to pay more to sign it and your monthly payment will be higher.
Although you make monthly payments on your lease, that money does not go towards building equity for the car. So if you hand in the car and are looking for a new car to lease, you cannot use that equity as a down payment. Most leases require money to be signed, which is extra money you’ll need to find if you don’t have a car to trade in.
No space for personalization
As a tenant, you cannot make any changes to your car. If you want to personalize your ride, then leasing is not the way to go. Any changes you make to the car must be reversed if you want to avoid a ton of unexpected fees at the end of the lease.
Car leasing has certain limitations, one of which has to do with mileage. The lease states the maximum number of miles you are allowed to drive and if you exceed this number you will have to pay an additional fee for each mile you drive. The mileage cap and the fee for additional mileage depend on several factors, including the type of car you are leasing and who you are leasing it from.
Before signing a lease, make sure you know how many kilometers you drive on average so that you know whether the mileage restrictions are realistic or not.
Fees at the end of the tenancy
If you choose to end the lease early, you may have to pay early termination fees. If you are confident that you will keep the vehicle for the duration of the lease it shouldn’t be a huge problem, but if circumstances outside of your control (like losing your job) arise, you may have to pay more out of pocket than you have with premature termination expected.
However, it is likely that the dealership will contact you up to three months before the lease expires. You want your business to continue. If you agree to exchange the car for a new lease in this situation, you will not incur any prepayment penalties.
If you return the vehicle after the lease has ended, the dealer will give it a thorough inspection or you can arrange for it to be done by an independent inspector yourself. The dealer will provide you with this information.
The car must be in good condition during the lease and only show normal signs of wear. If you return it with excessive wear and tear, you will be responsible for those costs. This includes keeping the interior clean and avoiding external damage.
Advantages of buying a car
The car is yours
When you buy outright or use a car loan to finance a car, you can customize the car to your liking. That said, you can decorate it with bumper stickers, buy cute aftermarket accessories, or even paint it a bright purple if you want. It also means that when it’s time for a new car, you can either trade in or sell your vehicle and use the proceeds as a down payment for your next trip.
No mileage limit
If you drive a lot for business or travel frequently, buying a car is the best option for you. With a lease, you would likely exceed the mileage limit and pay more at the end of the lease.
Car payments have an end date
Many people take out a loan to buy a new car and during that time they have a monthly payment. But at some point that loan amount will be $ 0 and once you pay it off you will be free from auto payments. This means that every month you have more disposable income to save or spend on what is important to you.
Bad credit is less of a problem
In general, car buyers with subprime credit have more financing options than leasing contracts. However, you will likely still have a higher interest rate than a borrower with a good credit score.
Disadvantages of buying a car
Higher short-term expenses
Although your car will eventually be paid off, when you buy a car you will likely end up paying more in the short term. The monthly car payments are higher than the leasing payments because you are funding the entire value of the vehicle rather than the depreciation amount over the lease term. You may also need a higher down payment when buying a car than when leasing.
Higher taxes and interest
When you buy a car, you pay sales tax on the vehicle price, which can be a significant part of the purchase price. You also have to pay interest on the amount you fund. With a lease, you only pay tax on your down payment and monthly payments, and you only pay interest on the depreciation amount.
Your guarantee is expiring
New car warranties are only valid for a specific period. After that, you will have to pay for the repairs yourself. Alternatively, you can opt for an extended warranty, but it costs more money to buy, which means choosing between an extended warranty or a cheaper car.
When weighing the pros and cons between leasing and buying a car, it is important to consider your personal needs and financial situation so that you can make the best decision for you and your family.
Catherine Hiles from Ohio is a British writer and editor who lives and works in the United States. She has a degree in communications from the University of Chester in the UK and writes on finance, cars, pet ownership and parenting.
This article originally appeared on www.thepennyhoarder.com