Leasing or buying a car is a significant financial decision that affects not just your monthly budget but also your lifestyle. Each option has pros and cons; your driving habits, financial situation, and future goals should play a part in your choice. Let’s explore leasing and buying to help you make an informed decision.
Leasing: The Short-Term Solution
Leasing offers a short-term commitment, typically lasting two to four years, and includes warranty coverage for most of that time. This can provide peace of mind because you are protected against significant repair costs. Another key advantage is that monthly lease payments are generally lower than car loan payments, making it easier to fit a newer car into your budget.
However, leasing isn’t perfect. One significant downside is mileage restrictions. If you drive a considerable number of miles annually, a lease may cost you more due to excess mileage fees. Additionally, wear and tear fees can increase quickly if you're not careful with the vehicle.
Leasing also offers little long-term value. After your lease ends, you have to return the car or buy it out, often at a higher price than if you had financed it. If you buy out the lease, you may find that the total cost over time becomes higher than simply owning a car from the beginning.
Buying: Long-Term Ownership and Flexibility
On the other hand, buying gives you complete ownership of the car once your payments are complete. This makes sense for those who want flexibility in how long they keep their vehicle and how they use it.
Buying a car allows you to build equity. As you pay off your loan, you own a larger portion of the vehicle until it's yours. While new cars do depreciate quickly—typically losing around 20% of their value in the first year—you eventually reach a point where you have no car payments, which is a big financial relief.
One downside of buying is that you're responsible for repairs once the warranty expires. These can add up, especially as the car ages. Another potential downside is that when it's time to trade in or sell, you may face the hassle of negotiating or dealing with depreciation losses.
If you want to minimize the initial depreciation costs, consider buying a used vehicle. By purchasing a car that is a few years old, you avoid the steep depreciation curve, and many used cars today are still packed with modern features and technology.
The EV Tax Credit Workaround
If you're considering buying an electric vehicle (EV), there's a federal EV tax credit worth up to $7,500. However, income limits might make some buyers ineligible. One potential workaround is leasing an EV instead of purchasing it outright. When you lease an EV, the leasing company (often the automaker’s financing arm) can claim the tax credit, even if your income exceeds the limit. This allows the leasing company to pass on the savings to you through lower monthly payments or a better lease deal, making leasing an EV an attractive option if you don’t qualify for the credit directly.
Key Factors to Consider
Whether you choose to lease or buy largely depends on a few personal factors:
How much you drive: Buying may be better if you drive a lot because leasing often includes mileage caps.
How long you keep cars: Leasing is ideal if you prefer to switch cars every few years, while buying is best if you plan to keep a car for a long time.
Your financial situation: Leasing typically has lower monthly payments but doesn't allow you to build equity. Buying costs more upfront but offers long-term ownership benefits.
Business use: If you use your car for business, leasing may offer tax benefits, allowing you to deduct leasing and operating costs.
Conclusion
Ultimately, both leasing and buying come with advantages and disadvantages. If you like the idea of driving a new car every few years with lower monthly payments, leasing might be a good fit. But if you're looking for long-term savings and flexibility, buying a car—particularly a used one—could offer more financial value in the long run. And if you’re interested in an electric vehicle, leasing could allow you to benefit from the EV tax credit even if your income exceeds the threshold. Evaluate your driving habits, lifestyle, and financial goals before deciding.
WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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