Is it Better to Lease or Buy a Car? How Will it Impact my Credit Score?
This seems to be an ongoing debate and a common discussion whenever someone finds out I am a professional money coach and budget advisor. It seems that most people truly feel leasing a car is the best option.
Here is a recent email that I received from Michelle and our email discussion:
“I wanted to ask you a question confirming what a friend of ours told my husband. My husband wants to either lease a new car or finance a used car. We have a friend whose business is getting leased cars and handles all paperwork and details (like a broker). He said that when the credit score is pulled by the dealer it will affect his by 5 -10 points. Is that correct? We already pulled one report and one score. I really appreciate your time. Thank you.”
“Yes, the score will lower a bit when a “hard” credit is pulled, such as an automobile loan. If you are shopping around for a car, do it within a week or 10 days. That way your credit score will be dinged only once for a hard credit inquiry. (It does not matter if you go to 5 or 6 places). It is part of the programming related to credit scores and if you do it in a cluster, it counts as one pull. If you drag out your search, then it could really affect your credit score.
Also your credit score will vary a bit, even if you are shopping for the same type of loan. That is because any company extending you credit may have different variables they are looking for. It’s part of the programming.
I know that it can be enticing to lease a car (low monthly payments) but buying is the best choice in the long-term. Drawbacks of leasing include having a yearly limit on the number of miles and final buyouts may not be the most favorable terms.”
“Thanks so much for the advice. In the past we have never leased. My husband doesn’t like to, his work cars/vans have always been bought or financed. It may be more expensive but the payments on a financed minivan [Michelle has a large family and needs an 8-seater] are very high, even the used ones. We have been rotating old cars for many years and at this point we want something to get us through the long run.
Do you think that in the end it’s still better to finance rather than lease with a buyout? We wouldn’t mind a cheaper car, just not sure there are enough choices.”
“I do strongly believe that leasing is not a good choice. Basically, if you lease, you will always be paying a monthly lease payment and never getting a break from that monthly obligation. At the end of the lease you don’t even own the vehicle and if you choose to purchase it, it is likely the price would not be very favorable. Honestly, the biggest influence on my point of view was reading The Millionaire Next Door:The Surprising Secrets of America’s Wealthy by Thomas J. Stanley. The book talked a lot about how much these millionaires spent analyzing the cost of auto ownership. They never bought new and would not consider leasing. Also, you may be interested in another financial blogger’s thoughts on this. Trent from Simple Dollar wrote Three Situations Where a Car Lease Might Make Sense.”
What have you chosen? Has leasing been a good experience for you? Has financing a used car been a good or bad experience?