It happens – your current vehicle no longer meets your needs, and it’s time to trade up. Maybe you’ve crossed the 100,000-mile mark, and want something with a little more life left in it. Perhaps you’ve started a family, and that hatchback is no longer enough. Whatever the case, you’re in the auto market now, and you’re staring down the barrel of a purchase. You have options here, but they can be confusing. Should you lease your next car? Should you use financing? Should you buy a car outright? There are pros and cons to each of these, so let’s explore the situation and see what’s what.
On the surface, leasing sounds like a great choice. You get a new car, a set payment per month, and then you get to trade up after just a couple of years without having to worry that you’re carrying a balance from your previous auto loan. It seems to make sense, and it can. Other benefits include the fact that you don’t need a massive down payment, so you can save a little cash up front. Additionally, because leases are based on a percentage of the car’s value rather than the full value (like a conventional auto loan), you may be able to get a lower monthly payment (although this can and does vary quite a bit).
Another benefit here is that you get to trade out in just a couple of years, so you don’t have to worry that the interior will start looking a little ragged, or that you’ll be forced to drive a decade-old car forever.
However, leasing isn’t for everyone.
For one, leasing requires that you have perfect credit. Got a few dings on your credit report? Chances are good that you won’t qualify for the lease. Another issue here is that you’re limited on the amount of mileage you can put on the car during the lease period. If you go over that amount, you could find yourself facing some significant costs that you hadn’t factored in.
Financing a car purchase has become the most common method. You have a couple of options here, but they all involve taking out a loan to pay for your car. You repay that loan over the course of several years. Duration can be as short as three years, or as long as seven depending on your credit, your down payment, and your personal preferences in terms of repayment speed.
There are a couple of options you can take when it comes to financing. The first and most commonly used is dealer financing. In this situation, the dealer you’re buying through will run your credit and offer you a loan from their financing partner, which is usually the lending arm of the automaker. You can also choose to obtain a loan on your own from a bank or credit union.
Both are costly, but dealer financing is always more expensive. You’ll also find that dealerships have a few tricks up their sleeve to pad profitability. For example, auto dealers don’t use the typical FICO score. Instead, they use the auto score version of the FICO. This number will be lower than your regular score, increasing your payments.
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Another problem with financing is that you’re purchasing the vehicle over time. You’ll be getting a loan based on the value of the vehicle at that time, and your payments will be based on that value for the duration of the loan. Why is that bad? Well, for one thing, the value of your car depreciates immediately when you drive it off the lot. Moreover, by the time you’ve paid off the car at the end of the loan, chances are good it will be worth half of what you initially paid, if that much.
While financing ultimately ends in buying, it’s a drawn out process. You can cut it short by purchasing a car outright, though. Of course, chances are good that you can’t afford to pay off a brand new car right away – most people who aren’t already independently wealthy can’t. Still, there are options. For instance, you can buy a used car from a private seller for far less than what you’d have to shell out at the dealer, making it much more possible to own your car outright immediately, rather than having to shell out over time.
Depending on the price and the amount of money you have in the bank, you may be able to purchase a used car from a dealership for cash, but that’s not likely (unless you have between $5,000 and $10,000 just sitting around, of course).
With that being said, paying cash cuts out all the problems mentioned with the previous two options. You don’t have to worry about high interest rates, or charges for going over the mileage. You don’t have to worry about a credit check, or the dealership tacking on extra costs. Of course, that doesn’t mean that you’ll be protected from depreciation. You just won’t have to pay extra on top of the purchase price (interest).
Which option is right for you? Only you can answer that. It’s important that you take some time to compare the different options and decide what fits your needs best. If you don’t care anything about actually owning your car and like to trade up frequently, leasing could be a good option. If you’ve got a good amount in savings and don’t mind parting with it, then buying outright could be worth exploring. If you don’t have enough to buy with cash, and you’re not wild about leasing, then financing is going to be the only option available.