Buying a vehicle with a conventional car loan is quite simple: You ask for a loan from a bank, a credit union or another credit institution and make monthly payments for a few years. A part of each payment corresponds to the interests and the rest to the principal. The higher the interest rate, the higher the payment. As you return the principal, you accumulate equity until, at the end of the loan, the car is all yours.
As car prices increase (now they cost on average more than $ 12, 000) and buyers are beginning to demand the latest safety features that are available only in newer cars, renting or leasing a vehicle has become a more popular alternative to buying. With a rental, buyers make a monthly payment to drive a new car for a specified period. That payment is typically less than the monthly cost of financing a new vehicle, but buyers must return the car at the end of the rental term.
With more people than ever working from home, the mileage restrictions in a rental agreement may not be a factor for many buyers. Quite the contrary: Many may find that they are not using the miles they have paid.
The predictability of payments and costs of ownership (there are no expensive repairs when there is a warranty!) Have their appeal . However, life can be unpredictable, as we all learned in 2020, and a rental has less flexibility than a purchase.
To find out if renting a car is right for you, we analyze the advantages and disadvantages.
The advantages of renting
At first glance, renting or renting may be more attractive than buying. The monthly payments are usually lower because the principal is not returned. Instead, you just take out a loan and pay the difference between the value of the car when it is new and its residual value (its expected value when the rental ends), plus financing costs.
The main advantages of renting
• You drive the car during the years in the which has fewer problems.
• You always drive a late model vehicle that is covered by the manufacturer’s warranty, which may include free oil changes and other scheduled maintenance.
• Having a predictable monthly payment with no unexpected repair costs can make it easier to meet a family budget.
• You can drive a better equipped vehicle at a higher price than you could afford. This may allow you to opt for life-saving safety features that are not available on lower models or used cars.
• You don’t have to worry about fluctuations in the car’s resale value or go through the hassle of selling it when it’s time to move on.
• There could be significant tax advantages for business owners.
• At the end of the contract for rent, you just have to leave the car at the dealership.
Disadvantages of renting
• In the end, the rent usually costs more than an equivalent loan, if only because you are always managing an asset that is depreciates quickly.
• If you rent one car after another, the monthly payments continue forever. On the contrary, the longer you keep a vehicle after paying off the loan, the greater the value you will get from it. In the long term, the cheapest way to drive is to buy a car and keep it until it is not profitable to repair it.
• Rental agreements specify a limited number of miles. If you exceed that limit, you will have to pay a penalty for excess mileage. That can vary from 10 to 50 cents for each additional mile. So be sure to calculate how much you plan to drive. You will not get a credit for the miles you do not use.
• If you do not keep the vehicle in good condition, you will have to pay excessive wear charges when you deliver it. So, if your kids tend to go crazy over magic markers or you’re a magnet for dents and bumps in the parking lot, be prepared to pay more.
• If you decide you don’t like the car or if you can’t make the payments, that could be expensive. You will likely have to pay thousands of dollars in early termination fees and out-of-contract penalties, all of which will expire at once. These charges could equal the amount of the rental agreement in its entirety.
• With some exceptions, such as professional tinting of the windows, you must return the car in the same condition “in which it left the dealer ”, Minus the usual wear and tear, and configured as it was when you rented it.
• You will still be responsible for expendable items such as tires, which may be more expensive to replace on a better equipped vehicle with premium wheels .
An alternative to long-term loans
Some car buyers opt for long-term loans, six to eight years to obtain a lower monthly payment. But long-term loans can be risky and for these buyers, renting may be a better option.
Longer-term loans facilitate the “invested loan,” that is, when you owe more than what the vehicle is worth, and it stays that way for a long time. If you need to get rid of your car early, or if it is destroyed or stolen, the trade-in, resale, or insurance value is likely less than what you still owe.
Buy A car with a loan is not the way to go if you want to drive a new car every two years. If you take out a long-term loan and change cars early, you will pay so much financing costs, compared to capital, that it will be better to rent. If you can’t pay the difference on a reversed loan, you can usually roll over the amount you still owe to a new loan. But then you end up financing both the new car and the rest of the old car.
If your goal is to have low monthly payments and drive a new vehicle every two years without much hassle, then renting can be worth the cost additional. However, make sure you can live with all the mileage, wear and tear limitations and other similar limitations.
Difficult comparison
Difficult to make a comparison fair between, say, a six-year loan and the standard three-year rent. When the rental ends, the bank borrower still has three years of payments ahead of him, but the tenant has to find another car or perhaps accept the offer to purchase the rental contract.
A rental can also be “subsidized”. The automaker deducts an amount from the total value with an additional discount for rental contracts only, or may increase the residual value, or both.
An automobile manufacturer may also offer additional discounts on a rental agreement, which are not available to a loan customer. In addition, the “money factor” (interest rate) of a rental agreement can be different from the interest rate offered on a loan, making a comparison between two currencies almost impossible.
Typically, two three-year leases will cost thousands more than buying a car (with a loan or cash) and owning it for the same six-year period. And the savings increase for car buyers if they keep the car, for example, for another three years for a total of nine years, even taking into account planned maintenance and repairs.
If the Rental limitations put you off; consider buying a cheaper new car or a good used car, such as a certified pre-owned vehicle from a dealer, or getting a longer-term loan. Whether you buy your new car for cash, as with a loan or a rental, you can save by choosing one that maintains its value, is reliable and has good fuel economy.
To save for Upfront and long term, buy a used one. And pay cash.
Don’t forget to negotiate
Many people assume that the monthly payment printed on a rental agreement is set in stone. But that figure can be based on the manufacturer’s suggested retail price, which can be negotiated as if you were buying the vehicle.
However, keep in mind that the best rental deals are available only for those with excellent credit, and who can only be cheap because the automaker is trying to get rid of low-selling cars.
How are loans and rentals different
Below are some of the main differences between buying and renting.
| TO BUY | RENT | |
| Property | You own the vehicle and you can keep it as long as you want. | You do not own the vehicle. You can use it, but you must return it at the end of the rental, unless you decide to buy it. |
| Startup costs | Include cash price or advance, taxes, registration and other fees. | May include the first month’s payment, a refundable security deposit, an acquisition fee, an advance, taxes , registration and other fees. |
| Monthly payments | Loan payments are usually higher than the rent because you are paying the full purchase price of the vehicle, plus interest and other finance charges, taxes and fees. | Rent payments are almost always lower than loan payments because you only pay the depreciation of the vehicle during the rental term, plus interest (called rental charges), taxes and fees. |
| Anticipated termination | You can sell or trade your vehicle at any time. If necessary, the money from the sale can be used to pay off the loan balance. | If you end the rental early, the charges can be as high as meeting the contract. Sometimes a dealer can buy the car from the rental company as an exchange, which frees you from the expense. |
| Vehicle return | You will have to take care of selling or changing your car when you decide you want another one. | You return the vehicle at the end of the rental, pay the costs of ending the rental and leave. |
| Value future | The vehicle will depreciate, but its cash value is yours to use as you wish. | The positive side is that its future value does not affect you financially. The downside is that you don’t have any assets in the vehicle. |
| Mileage | You can drive as many miles as you want. But keep in mind that higher mileage reduces the vehicle’s trade-in or resale value. | Most rental agreements limit the number of miles you can drive, often 10, 000 to 12,000 year. (You can negotiate a higher mileage limit.) You will have to pay fees for exceeding your limits. |
| Excessive wear | You do not have need to worry about wear and tear, but it could reduce the trade-in or resale value of the vehicle. | most rental agreements hold you responsible. You will have to pay additional charges for exceeding what is considered normal wear and tear. |
| End of term | At the end of the loan term, you will not have to make any more payments and you will have created a capital that will help you pay for your next vehicle. | At the end of the rental (usually two to three years), you can finance the purchase of the car or rent or buy another. |
| Personalization | The vehicle is yours to modify or customize as you wish, even if you do may void the warranty. | Because you must return the vehicle in condition of sale, any modification or custom piece you add must be removed. If there is any residual damage, you will have to pay to repair it or you will have to file an insurance claim and pay a deductible. |
Should you buy or rent a new car?
Buying and renting a new car has advantages and disadvantages. Consumer Reports money expert Octavio Blano reveals in the television show Consumer 101 how to find the best option for you .
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.
Consumer Reports has no financial relationship with the advertisers on this site. Consumer Reports is an independent, nonprofit organization that works with consumers to create a just, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.