Leasing vs. Buying a Car: Advantages & Disadvantages

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  • 0:00 Overview Of Car-Buying Process
  • 1:07 Buying A Car
  • 3:16 Leasing A Car
  • 4:30 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss the car-purchasing process and examine the differences between buying and leasing a vehicle. We'll also learn the advantages and disadvantages of each.

Overview of Car-Buying Process

Sue recently graduated from college and landed a job at a top accounting firm. She just received her first paycheck and is headed to the dealership to purchase a brand new car.

As she arrives at the dealership, Tom, a salesman, walks out to greet her. She tells him she's interested in financing a new GZ Sport. Tom asks her to complete an auto application, which inquires about her employment and income. After she finishes, the finance department runs a credit check and tells her she's eligible to purchase or lease the GZ Sport.

Sue tells Tom this is her first car purchase and that she's not familiar with the process of buying or leasing. Tom explains that buying a vehicle allows the buyer to take possession of the vehicle and make payments for a specific period of time, after which they own the vehicle. Leasing requires the buyer to make payments also, but after a predetermined period of time, the buyer returns the vehicle to the dealership.

For the rest of this lesson, we'll explore the advantages and disadvantages of buying and leasing.

Buying a Car

Tom starts by explaining to Sue the advantages of buying. If you want to keep the car until the tires fall off, then buying is one main advantage. Car loans usually have a term of 4-6 years. After the loan is paid off, you no longer have to make payments and can save the money or use it for other purposes.

Another advantage of buying is there are no mileage restrictions. If you drive a lot, you can put any number of miles on the vehicle because it's yours.

While buying has advantages, there are also disadvantages; for one, the lender typically expects a significant down payment. A down payment is a percentage of the purchase price that reduces the total loan amount. For example, if the car costs $40,000, the lender may require a 5% down payment, or $2,000. You would then finance the car for $38,000 ($40,000 - $2,000).

Another disadvantage is negative equity. Negative equity exists when the car is worth less than the loan amount. Let's say you finance the car for $38,000, and six months later, the car manufacturer decides to discontinue the GZ Sport model. Suddenly, the value of the car drops significantly since it's not a popular car any longer. Let's say you decide to sell the vehicle, but buyers are only willing to purchase the car for $33,000, resulting in negative equity of $5,000 ($38,000 - $33,000). This means a buyer will give you $33,000 towards the loan payoff, and you're responsible for the other $5,000 to totally payoff the loan.

Lastly, another disadvantage of buying is that the warranty does not typically extend to the life of the loan. The manufacturer may offer a three-year warranty on parts and labor, after which you are responsible for any repairs. Remember, car loans usually last 4-6 years, and as fate would have it, many major repairs are commonly needed after the warranty period ends. Tom then explains to Sue the advantages and disadvantages of leasing.

Leasing a Car

The advantages of leasing include a smaller down payment, as well as monthly payment. The smaller payments may also allow you to qualify for a more expensive vehicle.

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