The Fed’s recent move to cut its benchmark interest rate offers some hope to prospective car buyers, as taking out an auto loan may soon become more affordable.
While not the only factor that influences the rate you receive (your credit, among other factors, is key), “car loans tend to track with the yield on the five-year Treasury note, which is influenced by the Fed’s key rate,” said The New York Times. In other words, the Fed’s latest move “will help Americans who need to borrow money to buy a new car” — although it could still “take months to reach borrowers,” said Kelley Blue Book.
But taking out an auto loan to purchase a car is not the only option if you are in need of a fresh set of wheels. Especially if “low monthly payments and a smaller down payment are a priority” for you, a car lease may be well worth considering, said the Times.
How does leasing a car compare to buying? Here is a breakdown of the pros and cons.
What are the pros of leasing a car?
When you lease a car, you basically “rent it for a specific and limited time period,” said Investopedia, after which you return it to the dealership. Leasing can offer a number of advantages, including:
Your monthly payments are lower. “Since you are only paying for the depreciation that is expected during your time with the car, rather than the entire cost of the vehicle, your monthly payments are generally lower with a lease than a purchase,” said U.S. News & World Report.
You can get a new car more often. “The average lease is 24 or 36 months,” and once it is up, “you can return it and get your next new car,” said Investopedia.
You will always have warranty protection. “Unless you get an unusually long lease agreement or go well over the contract’s mileage limit, you’ll likely be covered by the vehicle’s factory warranty for the entire lease,” said U.S. News & World Report.
You will not have to worry about resale. Because you simply return the car to the dealer at the end of your lease (unless, of course, you decide to buy it), “you don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on,” said Consumer Reports.
What are the downsides of leasing?
Of course, there are drawbacks to leasing as well:
You will not own the car. Perhaps the biggest downside of leasing is that at the end of it, you will not own the car. Instead, “your monthly payments will continue when you either renew your lease or lease a new vehicle,” which “means you are never without payments and never fully own the car,” said Bankrate.
You will have restrictions on usage. When you lease, you will face mileage restrictions, which “can impede how much and how far you wish to drive,” said Investopedia. Further, “you can’t customize your ride,” nor can you “get your vehicle fixed just anywhere,” said U.S. News & World Report.
You could face fees and penalties. “Fees in your lease contract apply to excess mileage, modifications to the car, and excess wear and tear,” said Investopedia, not to mention an early termination fee if you decide to end the contract early.” On top of that, “the amount of money you owe at the end of the lease can be surprising,” said U.S. News & World Report.
Is leasing or buying right for you?
Unsure whether to make the leap on leasing or hold out for lower auto loan rates to buy? Here is a simple breakdown of the two choices:
When to lease: Leasing may be a good bet if you want to avoid a “substantial financial commitment upfront” and would like lower monthly costs (just remember those monthly payments will not end in ownership), said Bankrate. Before leasing, be aware of the “mileage restrictions and potential excess wear-and-tear charges.”
When to buy: Buying lets you be “in total control when it comes to your vehicle and finances,” with no concerns about “mileage restrictions or possible additional charges for things like wear and tear,” said Bankrate. However, you may pay a little more each month, and you will need to have a lump sum to put down. Still, at the end of the term, you will own your vehicle.