Should College Students Lease or Buy a Car?

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Published April 29, 2013

| FOXBusiness

Buying or leasing a car is a big-ticket purchase for students or recent grads, but a recovering economy and tough job market have made Gen Y drivers more cautious when seeking out a set of wheels.

According to automotive data reporting company Polk, young adults aged 18 to 34 accounted for nearly 30% less of new cars bought in 2011 than in 2007. 

When tackling student loans and other financial obligations, experts say it’s important for young adults to weigh out their all of their options when looking to either lease or purchase a car.

“It’s important to know what you can afford, what the financial picture of owning or leasing a car looks like,” says Ron Montoya, consumer advice editor for Edmunds.

“It can be very tempting to really want to get into a car that shows off that you’ve just graduated [but] if it’s not something that you can afford, you may run into trouble down the line.”

When deciding whether to lease or buy, here’s what experts say students should weigh out before making the decision.

Establish a Budget

Students and grads need to understand what they can realistically afford with the help of an auto calculator to find a price range of cars within their budget. 

Making consistent on-time payments is just as critical for young adults to build a strong credit history as it is to stay within their means, says USAA certified financial planner practitioner, JJ Montanaro. 

“I always encourage people to shoot for roughly 10% of their gross income, to be at that level or less when it comes to car payments and folks will look at that number and say ‘gosh, that takes a lot of the cars off my list’ but it will certainly keep them out of trouble,” he says.

For shoppers who end up buying, getting preapproved for a loan before going to the dealership can also give an idea of what their credit looks like, what interest rates they qualify for and how much car they can actually afford, making negotiation much simpler, recommends Montoya.

Leasing Cons

Leased cars have an annual mileage limit and going over that amount means extra fees.

“You’ll see an advertisement offer for a lease but that number happens to come with 10,000 miles a year and if you’re going to be over when you turn it in, it’s going to be 25 or 50 cents a mile,” says Montanaro.

Montoya explains that leasing becomes a continuous cycle of jumping from car to car, leaving owners with nothing to show for it at the end of the leasing term.

“If at some point you want to stop that cycle, let’s say you choose to buy the car that you have leased, whatever you’ve paid for it up until that point is not going to count and you’ll have to just pay the balance off to purchase the car--basically the payments you’re making on a regular basis aren’t counting towards anything.”

Leasing Pros

Young shoppers wanting flexibility rather than a long-term commitment may find that monthly and down payments are typically lower on a leased vehicle, according to Scot Hall, executive vice president of Swapalease.com.

“You’re just starting to figure out…what path you want to take and the first [car] you select might not be the best one--a shorter term commitment on something significant like a car payment might let you more easily change direction,” he says.

Leasing a relatively new car under warranty can also prevent cash-strapped grads from having to pay out of pocket for repairs, says Montanaro.

“A lot of brands are offering free maintenance for a certain number of years, so clearly that can be an advantage from a lease standpoint.”

Buying Cons

Cars begin depreciating in value as soon as they’re driven off the lot and without the coverage of a warranty, owners are responsible for any repairs out of pocket.

If young grads plan to drive the car for awhile, it’s important to keep in mind how their lifestyle needs might change in that time period, says Hall.

“Things are probably going to change dramatically in a six to seven year period, possibly going from a single individual to a married individual with kids, and there is so much potential for quick change there that I think it’s really hard for someone to plan that far ahead,” he says.

Buying Pros

Purchasing a car and driving it for a long time after paying it off in full can save owners from having to continuously shell out for leased car payments and drive as many miles as they want without extra costs.

Calculating the true cost to own can help prospective buyers look at the cost of a specific car including maintenance and insurance expenses to give a rough picture of what ownership would look like over a five year period. 

While owners pay their own maintenance costs, the experts say even more moderately priced cars have upgraded to better quality safety and technology features, explains Montoya.

“Cars are being made better than ever now and there’s not a lot that needs to be done to it nowadays as long as you maintain it, which does cost some money in itself but as long as you keep up with the proper maintenance, you shouldn’t have too many out of pocket expenses.”

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http://www.foxbusiness.com/personal-finance/2013/04/29/should-college-students-lease-or-buy-car/