Thinking of buying a car?

It’s good to know the difference between a purchase and a lease. There are also many other factors to consider in your car buying journey. Things like down payment, the APR of the loan, and the loan term. Loan terms are usually discussed in months so it’s good to calculate by dividing by 12 to get how many years you will be paying off this loan or lease.

What is a Lease?

The main difference between a purchase and a lease is that a lease doesn’t belong to you. You are paying for the right to use a vehicle, and paying to maintain this vehicle. The same way you would rent an apartment. It’s similar to buying as you need to have a down payment, you need to pay for vehicle maintenance, and you will be paying a monthly payment. Usually these monthly payments are relatively similar which gets many people confused at the end of a lease, when they are required to give the car back, upgrade, or buy out their “lease”.

The upsides to leasing are if you like driving nicer newer cars, usually the monthly payments are much smaller than purchasing. Just keep in mind that you will not get to keep the car at the end of the lease, which is the whole point of them. When leasing a car you are also getting a newer car which can significantly reduce maintenance costs.

The downsides to leasing are if you drive too much you can be charged for every extra mile you drive over the lease agreement. You are also charged for any damages done to the car that are beyond normal wear and tear.

You do have options though. At the end of your lease you can always move on to the next vehicle, or you can purchase your leased vehicle if you desire. This is why negotiating the buy out price is necessary, even if you don’t intend to purchase the car.

What is a Purchase?

A purchase is what we all imagine when getting a new car. We borrow money from the bank or a dealership in order to get full ownership of the vehicle. Although usually more expensive, this gives you full control of the vehicle. Things like customization, mileage, trading in, or selling.

Although it can get confusing, since you are still paying off a loan you’d think the car isn’t yours yet. It can also get real confusing when the loan is worth more than the car itself. Sometimes you want to trade in or sell the car and the selling price doesn’t match what you owe, leaving you without a car and still owing a car payment. Cars depreciate in value very quickly, so it’s best to think twice on what you can afford and know that buying a car isn’t an investment, but a liability.

Bottom Line

When deciding between the two it depends what you’re looking for. If you like driving nicer luxurious cars but won’t be worried about mileage, care about ownership, or always want the newest car. Then maybe leasing might be a good option for you. If you really like to drive your car and are looking for ownership. You might want to go for a purchase. Just know the difference when you walk into the dealership and know what you’re negotiating. Also remember the dealerships definition of affordability isn’t the same as what you would be comfortable paying. It’s in their best interest to make you walk away with a car or loan you can barley afford. I wouldn’t recommend going over 10% of your salary for monthly car payments. You can also use this calculator to see how much car you can afford comfortably.

Remember you are in control of your finances, and sometimes buying a reliable used car can go a longer way than buying or leasing new.

Thank you for reading and I’ll see you next Sunday,
– Pablo