Whether to buy or lease your next car will very much depend on your needs and circumstances.
What is car leasing?
Leasing is effectively a long-term rental agreement with an institution offering the facility - usually a bank or car manufacturer offering in-house finance.
How leasing works
With leasing, you never obtain ownership of the car you drive â€“ you â€œrentâ€ it for an extended period of time. At the end of the period you hand the car back and walk away or, by signing a new agreement, get into a new car again. The leasing company still has an asset, albeit a used model, which still holds significant value. You have effectively financed its depreciation and interest costs for a period of time.
How a lease agreement is structured
A periodic lease agreement is signed with the service provider upfront, allowing you to calculate your monthly expenses. This service normally assumes comprehensive insurance and a full maintenance plan (and some wear and tear items like tyres, broken windshields etc). Conditions do apply, so make sure you understand upfront which costs the lease company is liable for. Some lease agreements put a limit on annual mileage.
When leasing works well
Depending on your lease agreement, the monthly payments on a car lease may be significantly less than those you would have incurred had you financed a loan on the same vehicle, especially true when interest rates are high. This is advantageous if you only plan on owning the vehicle for a short time. Effectively, it may cost less to lease a new car over a short period of time, than it would cost to buy the same car and trade it in.
Leasing is often a good option for people looking to consistently drive newer cars.
Downsides of leasing
A drawback to leasing is the audit process when returning a leased car. The lease agent will finely scrutinise the car to evaluate the damages done to the car. You'll have to pay extra fees for anything not considered normal wear and tear and also if you have exceeded your allotted mileage, had it been part of your agreement.
When buying works well
From a long-term investment point of view, buying a car
may be preferable, since you obtain ownership of a car at the end of the finance period. When a car is fully paid, you have an asset to use and enjoy indefinitely, sell for cash or trade in on a new car in lieu of a deposit. When interest rates are low, buying becomes a better option as the monthly costs are very similar to those of a leasing agreement. The only real differentiating factor is that at the end of your agreement period, buying leaves you with an asset and leasing does not.
Buying is a good option for people who plan to drive the same car for a lengthy period or when looking to buy a used car
Downsides of buying
A downside of buying is that, unless your car comes with a service plan (often standard on many new cars today), you are liable for full maintenance costs together with insurance, fuels, and wear and tear items like tyres and licensing (most of which, except for fuel, are usually covered by a lease agreement).Another drawback is that you will be driving the same car for a long time, which invariably means it will be outdated at some point.