Once you’ve decided it’s time to get a car, you get to make the really big decision: Will you buy a car that you finance with a loan, or will you opt to lease?
Leasing can sure look enticing. For instance, the monthly lease payment for a 2019 Honda Civic Sport might run you about $280 or so for a 36-month lease, according to Edmunds. Buy the same car and you’d shell out around $420 a month with a five-year loan.
But what looks more affordable can end up costing you tens of thousands of dollars over your adult car-buying life.
With a lease, you sign a contract and agree to make payments for a set period of time, like 36 months. When the lease period is up, you can either hand in the keys and be on your way, or you can “buy out” the lease and keep the car. Most people who lease a car treat it like a three-year rental: When the lease is over they return the car and then lease another.
“Once you get on the leasing merry-go-round, it’s hard to get off,” says automotive journalist Jack Nerad, who writes for publications like Driving Today and Forbes, and who is the author of “The Complete Idiot’s Guide to Buying or Leasing a Car.” “When the lease is up, you just lease again. And again. You can end up making monthly car payments forever.”
Moreover, if you’re still working on building a solid credit score, don’t get all excited by low-cost lease deals you see on ads. Those deals are typically for folks with a FICO credit score of at least 750.
If your credit score is lower, you may still be able to lease, but you may have to pay a higher interest rate as well as a down payment.
Thinking you’ll take advantage of lower lease terms today and then buck the trend and buy out the car after three years? That’s better than flipping to a new lease, but it’s still not ideal since you may need to take out a four- or five-year loan to buy out the lease after three years. “That’s an awfully expensive way to buy a car,” says Nerad.
The far better financial move, experts say, is to buy a car and, assuming you don’t have the cash to pay for it, take out a loan for five years or less.
“The goal is to get a loan for as short a period as you can afford, and then plan to keep driving the car for at least five years after you have paid off the loan,” says David Haas, a certified financial planner in New Jersey.
The average car loan these days is nearly 70 months, according to Experian Automotive. It is smarter to aim for a loan no longer than 60 months—Haas recommends 48 months if you can—so you give yourself more years of driving, payment-free. The car mavens at Consumer Reports say a solid model that you give maintenance and TLC can last 200,000 miles.
When you don’t have a monthly car payment, you can use that money to tackle other goals like paying down student loans, building an emergency fund, or goosing your retirement savings.
“Or you can use some of that savings to help pay for the next car,” says Haas. “If you make a bigger down payment on the next car, you will be able to afford a shorter loan. Or be able to pay in cash, which is always the best option.”
Buying can actually help you down the road: Eventually, when you are ready to move on to your next car, you may be able to get money in exchange for trading in or selling the car you’re giving up.
By contrast, though, you don’t build up any equity when you lease.
Another advantage of a loan is that paying it off, on time, will help you build your credit score. Nerad points out that if you stay on the leasing merry-go-round, you’re always going to be making monthly payments. Once you pay off your loan, though, that will boost your score.
“A car is a depreciating asset—it loses value—and a new car has its biggest depreciation in the first few years,” says Haas. “You’ll be better off buying a used car that has already had a lot of depreciation you didn’t pay for.”
A pre-owned car that is three years old might cost 30 percent to 40 percent less than this year’s model, and that lower price will make it easier to afford a shorter-term loan.
This is where you can take advantage of other people’s expensive leasing decisions, too: Dealer lots are full of cars that were leased for a few years and are now for sale as used. Often these still-young cars have low mileage and come with a warranty backed by the manufacturer. That can offer valuable peace of mind.
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