Borrowing

4 questions to ask yourself when deciding whether to buy or lease your next car

Twenty/20

When drivers are thinking about their next car, a common question comes up: "Buy or lease?"

While leasing used to be a less desirable way to get a car, it has increased in popularity over the last 10 to 15 years. Now nearly a third of new car acquisitions are leases, according to Cox Automotive's 2018 Used Car Market Report & Outlook.

If you're weighing leasing a car versus buying one, there are several factors to consider, including your finances, your driving habits, and the kind of car you want to own. Ultimately, you'll want to figure out the value of the vehicle and how much you'll be spending over the long-term before you decide which option makes sense for you.

To help you decide, experts say, ask yourself these four questions.

1. How much are your monthly payments?

Unless you have the funds to pay for a car outright, you'll be making monthly payments whether you chose to lease or buy. By the numbers, leasing can seem cheaper than buying: The average monthly lease payment is exactly $500, while the average loan payment for a new car is $567, as of early 2019, according to Cox.

Loan terms run for an average of just under six years, according to Ronald Montoya, senior consumer advice editor at Edmunds. Lease terms are usually about half that, so the advantage is that you're paying less over a shorter period of time. The downside is that at the end of the lease term, you don't have a car — and will need to either lease another one or buy.

Even if your monthly auto payment isn't a burden, any break between car purchases could let you put thousands of dollars towards other financial goals like retirement, college savings, or buying a home. That's another point in favor of buying rather than leasing, provided you drive your car for at least a few years after paying off the loan.

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2. What's the residual value of the car?

If you're unsure of whether or not you're getting a good value by leasing, consider the car's residual value, or its estimated worth at the end of your lease. That number appears on the lease itself, though crucially, it may not be what your car is actually worth when the lease is over.

When your lease expires, there are typically two options for what to do with the car, according to Montoya. You can simply return the car and buy or lease a different car, or you can buy it outright for its residual value.

For example, a 2019 Honda Civic costs $17,778 upfront. At the end of a 36-month lease, current deals in many markets offer a purchase price of $11,718.

If you want to buy after the lease is up, experts say it's important to compare the car's residual value on paper to its actual value after you've spent several years driving it. Kelley Blue Book, Edmunds, and other auto sites offer tools to help you gauge that figure. If you've taken good care of the car and the residual value ends up being lower than its actual value, buying outright could be a really good deal.

Industry analytics company ALG releases a list every year of the manufacturers and models that hold their value the most consistently, with Honda and Land Rover coming out on top for 2020.

3. How much do you drive each year?

The typical driver travels 13,476 miles per year, according to the Federal Highway Administration, with drivers between the ages of 20 and 54 commonly exceeding 15,000 miles annually.

It's important to have a good idea of how much you drive before entering into a lease, says Matt DeLorenzo, senior managing editor at Kelley Blue Book. If you tend to put a lot of miles on a car, then you are better off buying, he says.

That's because auto leases almost always include a mileage limit. That typically falls around 12,000 miles per year but can range from 10,000 to 15,000, depending on the terms of the lease. Agreeing to a lower mileage limit can reduce your monthly payment — and if you want more miles, you can expect to pay a higher monthly rate to compensate for that extra vehicle depreciation.

Go over-limit and you can expect to pay fees of around 15 to 25 cents per mile when you turn in the vehicle at the end of your lease. Driving 3,000 extra miles can cost you as much as $750, for example. So make sure you're tracking your mileage.

If you've got to have a new car every two or three years, you can afford the monthly payment, you don't put a lot of miles on a car, then definitely look at a lease.
Matt DeLorenzo
senior managing editor, Kelley Blue Book

4. How frequently do you want a new car?

The decision to buy or lease doesn't only hinge on the car's price point and the value. Experts say it's also important to consider how long you want to keep driving the same car, and how your driving habits may change over the next few years. Someone who plans to have kids, for example, might find that their needs shift as their family grows. At some point, you may need to swap out your compact for an SUV or a minivan.

Ultimately, it's a matter of personal preference.

"If you are someone that keeps your cars a long period of time, then buying a car's the way to go. If you're someone who gets bored of your car every three to four years, then leasing is the way to go," says Montoya. "And if you're just looking for the most financially sound option, as far as owning a car, it would be buying a used car, paying it off, and keeping it for a few years."

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