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Lease vs Buy: Have It Both Ways

It’s no surprise that the vast majority of new-car buyers don’t pay for a vehicle outright. Single “cash” transactions — with no financing or lease — are rare for all but the priciest and most exotic new vehicles. For mainstream buyers, two transaction types dominate: Leasing and financing, provided by the dealer or through a third party such as a bank or credit union. Each type has its drawbacks and benefits, so the lease vs buy decision can be tricky.

But for households with two or more vehicles, the best strategy may not be to choose between the two. Instead, two-vehicle households can finance one vehicle and lease the other. The strategy blends the advantages and, in some ways, cancels some of the drawbacks.

Financing a new car with a loan is the most popular way to buy a new car. Buyers typically provide a cash down payment that may include a trade-in vehicle, and pay the balance including interest over time, usually three to six years. Shorter-term financing typically yields lower interest rates but higher monthly payments. A larger down payment can keep payments and interest rates in check, but not all buyers have a vehicle to trade in or thousands in spare cash for a down payment.

That’s the big disadvantage to buying a new car with financing: Prudent deals with little or no money down are rare. Financing’s big advantage over leasing is eventual freedom from car payments and ownership at the end of the financing term.

Leasing has its advantages too, but a leased vehicle comes with more strings attached. The most important benefits of a lease compared to financing are lower down payments and lower monthly payments. For a lease, the down payment, or money due at signing, can be at or near zero. Payments are lower as well because they cover only the cost of using the car during the term, not the entire cost of the vehicle.

The big drawback is turning the car in at the end of the lease term. Mileage restrictions and penalties for excess wear or damage can discourage some shoppers from leasing, too.

Two-vehicle households can play both sides of the table by choosing a financed deal for one vehicle and a lease for the other. For example, one vehicle in a such a household is often the workhorse. It’s practical for a wide variety of uses, and its mileage shows that it’s the go-to vehicle. Financing it is the better choice because it means no mileage limits and no nickel-and-dime charges for the inevitable wear that comes from high use.

If the financed, workhorse vehicle is positively worn out at the end of the term, it can be traded toward the down payment on a new, financed vehicle. Otherwise, it can continue to serve while blessing its owners with no monthly payments.

Leasing a second vehicle may be wise, especially for shoppers leaning toward a more specialized choice. For example, many electric vehicles and plug-in hybrids are offered at attractive lease rates. A lease lets a driver try out the technology without committing to it for the long haul. Sportier cars are another category that can be fun in the short term — over a three-year lease, for example. But a growing family or a new teen driver can quickly take the thrill out of a cramped, high-performance coupe.

With one vehicle financed, leasing a second car can be sensible for more mainstream choices for the same reason. Drivers’ needs change. A pickup capable of pulling a trailer may replace a sedan. Trading early in a finance term can prove expensive. Turnover for leased vehicles is quicker, giving drivers an opportunity to reassess needs every few years. Shorter terms mean more new-car experiences to break up the monotony of long-term ownership, too.

Buying one and leasing one can result in at least one car with little or no service issues. That financed vehicle may require more maintenance and repairs as its mileage builds, but a newer, low-mileage leased vehicle is unlikely to spend too much time in the service bay.

Solving the “lease vs buy” puzzle is less complex for new-car shoppers in two-vehicle households. Provided they can limit mileage on one vehicle, they have the available luxury of choosing both. As new-car leasing continues to grow in popularity, these drivers can take advantage of its benefits while hedging their long-term bets with one vehicle financed the traditional way.

What it means to you: Do you have two or more vehicles in your household? Choosing a lease for one and financing for the other may be a wise choice.

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