Leasing vs buying a car

If your clunker of a car is gasping its final breath, you are probably in the midst of deciding whether to lease a car.

There are pros and cons to either leasing or buying, but financial experts say buying and keeping a new car for the long term is usually the better deal. No matter which scenario works best for your individual needs, you should negotiate the deal, says Dayana Yochim, a consumer finance expert in Alexandria, Va.

“First negotiate the price of the car, then negotiate the trade-in value — if you have a car to trade — and then you can talk about how you want to finance the car,” Yochim says. “Even with a lease, everything is negotiable.”

Here are six things to think about when debating whether to lease vs buy your next car.

If your first priority is to keep your monthly car payments within a tight budget, leasing may be the better option.

“Lease payments are typically less costly than buying a car,” says Scott Michalek, a senior financial adviser with Wescott Financial Advisory Group in Philadelphia. “Your monthly payments will be cheaper, but when you walk away at the end of the lease, you won’t have anything to show for it.”

Michalek says leasing makes sense for someone on a very tight budget, but he warns that breaking a lease can be extremely expensive.

“If you can’t afford to make your lease payments or you want to end your lease early because you are relocating, you’ll pay a hefty penalty,” Michalek says.

Michalek says a lease contract typically will state that all remaining lease payments are due. So, if your lease payment is $300 per month and you want to return the car six months early, you will owe the remaining $1,800 of lease payments. You’ll also be charged an early termination fee, typically $200.

Some dealers may be willing to work with you on reducing these costs, but don’t count on it. If you need to terminate your lease, you may want to consider transferring your lease to someone else who’s looking for a short-term car lease. LeaseTrader.com and Swapalease.com facilitate these types of lease transfers.

Yochim recommends checking your credit three to six months before you start shopping for a new car so you have time to correct any errors on your credit report and to take steps to improve your credit score if you can.

Michalek says bad credit will hurt whether you buy or lease a car, but it will hurt more on the lease side. “If your credit is really bad, you may not be able to lease at all, because dealers typically only lease to consumers with good credit,” he says.

Even consumers with bad credit can usually finance a car purchase, although they won’t get the best interest rates, Michalek says.

Pete D’Arruda, president of Capital Financial Advisory Group LLC in Cary, N.C., recommends saving money so you can make a bigger down payment and borrow less in order to reduce the interest costs.

“You may need to go down a little in the quality of the car you choose if your credit makes the cost of borrowing too expensive,” D’Arruda says.

The typical car lease imposes a penalty on miles driven above an annual limit such as 15,000 miles.

“Some leases now limit you to 10,000 miles per year, so a lease really only makes sense if you don’t intend to drive the car much at all,” D’Arruda says.

If you have a long commute or frequently take long-distance vacations by car, you may be better off buying.

“If you lease your car, you won’t be as free to be spontaneous about road trips,” says Yochim. “Look at your current driving habits, and estimate how many miles you drive per year to make sure you won’t exceed the limit.”

Yochim says car leases are negotiable, so you may be able to negotiate a reduction in the excess mileage penalty or an increase in the number of allowable miles. Just be sure to negotiate this at the beginning of your lease because it’s unlikely you can change the terms when you turn in the car.