Is it Better to Lease or Buy a Car on a Budget?

The Ultimate Guide to Lease or Buy a Car on a Limited Budget and Time

You’ve probably heard this a million times. Yes, cars are one of the worst investments you can ever make. Not only are they expensive, they also depreciate at an alarming rate. Therefore, you need to be wise when making a car purchase, whether with cash or a loan. This is especially for students with a limited budget and anyone who wants to manage their finances wisely.

If you are visiting the United States on a short term, you may be wondering how best to move around. You may be tempted to indulge in an expensive car purchase. And this is not feasible for most students, especially international students, as they have job limitations and restrictions, in terms of where and how many hours they can work.

Thus, goes the question:

Is it better to lease or buy a car especially as a student, an international student or a tourist?

First things first. Do you plan to buy the car with cash? If not, you will need to finance the vehicle. This means you need proof of income and a good credit score, among other things, to qualify. Since you may have only been in the country for a short time, you probably may not have a credit history yet. Therefore, financing a vehicle may not be an option.

You could apply and get approved, but with limited to no credit history, you will have a high interest rate and a high monthly payment on an average of 36 or 72-month term. If you do the math here, any person with common sense will know it doesn’t make financial sense.

A six-year loan at 15% interest (assuming you have poor or little credit history) with a $500 monthly payment for a $20,000 car? At the end of the loan term you will have paid a whopping $6,000 in interest and left with a depreciated $5,000 or less vehicle. Not to mention, you may only be in the country for four years. What will happen when you have a six-year car loan? Are you ready for the penalties that come with breaking your loan agreement?

There’s no easy answer to the question of whether it is better to buy or lease a new car, especially if you are in the country on a short term. Each choice has its pros and cons. But with the right guidance you can make a wise decision, and that’s what I will guide you through.

Things to consider before you buy or lease a car while on a student or visitor visa:

1.How long will you be in the country for?

If you plan to be in the country for a long time, and you are financially stable, you may consider buying a good used car with cash. However, if you will be in the country for a short time, you would rather use alternative means of transportation such as Uber, Lyft or public transit. Put the money you could be wasting on monthly payments, car maintenance, gas and insurance towards your savings.

2. What is your financial situation?

Do you have a job? Are you in debt, debt free, or do you have a couple dollars to spare? As a student you probably are still financially dependent on your parents. Even if you have a job, between juggling with school and work, you are limited and may be earning a minimum wage. If so, hold off unnecessary purchases until you have a stable job and fully independent to take on extra expenses.

3. Are you visiting alone or with someone?

If you are traveling with someone, you could partner up and share the cost. This is a risky endeavor and you must be careful. If your friend fails to keep their obligations, such as failing to make their share of the payment, you may have to face the consequences and this could adversely affect your credit. A better option could be sharing the cost of Uber or car rental when you need to travel.

4. Will you be staying in one area or moving around frequently?

If you don’t plan to travel frequently, you may hold off buying or leasing a car and use other means of transportation, as the need arises. There is no point of having a car you only drive once a week while having other fixed expenses every month.

5. Where will you be staying most of the time?

If you are staying in the city, like in New York, what’s the point of having a car? Public transportation is very reliable. Most schools also offer students fare coupons to use or sometimes free rides in the local buses. You could save a ton by taking advantage of these options.

6. What is your monthly costs for leasing vs. owning?

Calculate your monthly costs for buying vs owning a car to determine which option is feasible to you financially. Depending on your situation, including the other factors discussed above, you will have a better idea on where you stand.

While this is not an exhaustible list, you can get where I’m going with this. You need to have a plan. But before you dive into a decision, get to know the nitty gritty details of leasing vs buying a car.

How does leasing a car work?

Leasing a car is like renting, but unlike renting, which is on a short term, leasing is for a longer term, usually about 2-3 years. You get into an agreement with a dealership and make payments for the use of the car over the lease term, and you return the car at the end of that term. At the end of the lease period you have the option of buying the car or giving it back to the dealer.

What’s the difference between leasing and financing a car?

Financing a car is taking out an auto loan to purchase a car. When you finance you are borrowing money from a bank so you can purchase the car from a dealership. Leasing a car is making monthly payments to use a car for an agreed term.

Buying a car while in college, does it make financial sense?

It depends on many factors. If you have the money to pay cash without straining your pocket, of course you can. But if you have to use borrowed money, such as auto loans and worse, student loans, to make a car purchase, the answer is ‘No!’

Don’t take out student loans to buy a car. Avoid the financial mistake of using student loans to buy a car. And you aren’t even allowed to use federal student loans for car purchases. When you take out a student loan, you agree that the money will be used for educational expenses, not personal use.

Most students are on a limited budget and still dependent on their parents for financial assistance. If you have extra cash to spare, put it towards you college tuition rather than a car, a depreciating, costly asset that will take more money out of your pocket than it puts in.

What if I need to build credit? Does leasing a car help build credit?

Yes, it can. If your lender reports to credit bureaus and all your payments are made in a timely manner, a car lease can certainly help to build your credit. There are however, other better ways you can build credit.

Is it better to buy or lease a car?

In order to answer this question, you need to consider the following costs:

Monthly payments
Leasing fees
Leasing penalties
Car insurance
Gap insurance
Down payment
Repairs
Depreciation

When is it better to lease a car?

There are certainly situations where it makes sense to lease than buying a car. If you are an international student or tourist on a visitor visa for instance, it may make sense to lease a car than financing. Here are the pros and cons of leasing a car:

Pros of Leasing a Car

Car leases usually have shorter terms than car loans.
You will have lower monthly payments than a car loan.
You’ll always be under a warranty thus not worry about major repairs.
You’ll get to drive a new car every two or three years.
You don’t have to worry about trading in or selling your car at the end of the lease.
You may get a tax write-off if the car is used for business.

Cons of Leasing a Car

You must show proof of income.
You may face early termination fees if you choose to end you lease early.
You can only drive a set number of miles throughout your lease term, usually 10,000 – 12,000 miles on average. Exceeding this will subject you to penalty fees of usually 15 to 25 cents per mile.
You must properly maintain the car throughout the duration of the lease or face extra charges for excessive wear and tear.
You may be required to purchase gap insurance.
You will have nothing to show for at the end of the lease as you will have to return the car to the dealership.
You cannot customize the car to your liking.
It is expensive in the long run, if you plan to lease for a long time.

When is it better to buy a car?

Pros of Buying a Car

You will own the car at the end of the loan term, and if you are buying cash, you’ll have outright ownership of your car.
You are free to drive as many miles as you want since it is your car.
You are free to customize your car any way you like.
You can keep your car for as long as you want thus spreading out the cost over time.
You don’t have to worry about possible lease-end charges.

Cons of Buying a Car

You’ll have a higher down payment and monthly payments than a lease.
You’ll have unexpected post-warranty repair costs. Most dealerships offer a 5-year warranty or up to 50,000 miles, whichever comes first. You may extend the warranty through third party options, usually up to 75,000 miles. But this means you will incur higher costs upfront. Once your warranty expires, you will have to cover the repair / maintenance costs yourself.
You get to deal with depreciation. A car loses about 10% of it’s value as soon as you drive it off the dealership and continues to lose its value steadily every year.
You’ll be responsible for trading or selling your used car if you want a different one

How to lease a car as an international student

Just like financing a car, leasing a car has minimum requirements that need to be met in order to qualify. But the requirements are not as strict as when financing a car. Even if you qualify, you need to ask yourself whether you will comply with the lease agreement. This includes making timely monthly payments, not exceeding the allowable mileage and keeping the car for the duration of the lease term. If you can do these then certainly.

This is what to know when leasing a car as an international student. You will need to prove the following before you can lease a car:

A good credit score.

A credit score is a 3-digit number, based on credit history, that reflects the likelihood that a consumer will repay his/her debts. This information is reported primarily to the three major credit bureaus (Experian, TransUnion, and Equifax).

The factors taken into consideration are mainly your payment history, total debt, length of credit history, types of credit, and any recent new credit. In this case, the dealership will use your credit score to determine your ability to make your monthly payments. A lower score will categorize you as a risky borrower and you may likely not qualify to lease or buy a car.

If you are new to the United States, you likely have little to no credit history. You need to put this into consideration before you rush to the dealership. Remember, getting disapproved for a loan or credit will further hurt your credit score.

Related post: How to Get A Perfect Credit Score

To get started building your credit, consider getting a secured credit card. Do not spend more than 30% of the credit and timely pay off the balance in full every month. This will help you start building credit over time. Some great secured credit cards to get started with are:

Wells Fargo Cash Back College Card: No annual fee. Best for students
Bank of America Cash Rewards Credit Card for Students: No annual fee. Great for ravel rewards.
Bank of America Travel Rewards Credit Card for Students: $0 annual fee. Great for credit newbies. No foreign transaction fees.
Capital One Platinum Credit Card: No annual fee.
Capital One Quicksilver Cash Rewards Credit Card: Earn unlimited 1.5% cash back on every purchase.
Discover it Student Cash Back: No annual fee. Great for cash rewards for students and credit newbies.
Journey Student Rewards from Capital One: Bonus rewards for on-time payments.
Citi Secured MasterCard: $200 security deposit required. $0 annual fee. Great for credit newbies.

Proof of income.

You will need to prove you have a stable job with steady income to justify your ability to make your monthly payments. You may be asked to provide a job offer letter, employer contact, pay stub or monthly bank statements to show proof of electronic deposits or income tax returns. If leasing a particularly pricey car, you may be asked for up to 2 years’ income tax returns.

As a student or if on a short-term visa in the United States, you probably have limited income or no job history. This could affect your eligibility to lease or buy a car.

A valid driver’s license.

Can you drive? Do you have a driver’s license? Is it valid? Before you head to the dealership make sure you can answer ‘Yes’ to these questions.

While you can buy a car even without a valid driver’s license, you can’t drive it on public roads. If you’re financing it, not only can’t you drive it, you won’t be able to license the car. Therefore, whether you’re paying cash or financing, we suggest you get your driver’s license issues sorted out first. I mean, what’s the point of getting a car you can’t drive?

You don’t need to be a permanent resident or U.S citizen to get a driver’s license. You can apply for your driver’s license at your local Department of Motor Vehicles (known as the DMV).

You will need the following documentation to apply for a driver’s license:

Form DS 2019
Form I-94
Proof of residency in your state
Proof of your legal presence in the U.S (Form I-20 or your passport with your visa)
Your Social Security Number or Form SSA-L676
Other state-specific documentation

Proof of legal presence in the United States.

If you are not a U.S. citizen or a legal permanent resident, you will need to provide proof of your legal presence in the United States. You may have to provide your Form I-20, if you are an international student, or Employment Authorization Document (known as EAD card) if on a work visa. This is used to verify how long you intend to stay in the U.S. If your visa is going to expire soon, chances are they won’t approve you for the lease or the loan.

Proof of address.

You will need proof of residency such as an apartment lease, any current utility bill, such as water or electric or a bank statement showing your address.

Proof of auto insurance.

To get an auto loan, you will need to have auto insurance. All drivers in the United States are requirement to have and maintain auto insurance. In some states, you might even need auto insurance before you can get your driver’s license.

Gap insurance.

Gap insurance helps pay the “gap” between what you owe on a car and what it’s currently worth. This helps when your car is deemed a total loss in case of an accident.

Lets say you don’t have gap insurance and your car gets totaled in an accident. You file a claim. Your insurance company will pay for the car’s market value while you may owe more on the car. So, if your remaining balance is $20,000 and your car is now worth $15,000, you will have to pay $5,000 out of pocket — for a car you no longer have. With gap insurance, it will cover the difference.

Therefore, if you are leasing or financing a car, it’s necessary and worth it to have gap insurance. In fact, it might be required by the dealership or your finance company. But if you are paying cash for a car, you certainly don’t need gap insurance.

Best Affordable car leasing deals for students

Toyota Student Discount

Toyota’s College Graduate Rebate and Finance Program offers a $500 rebate on all new unlicensed Toyota models when you finance or lease through a Toyota dealer and Toyota Financial Services. Plus, no payments for 90 days on select finance programs.

To qualify, you’ll need:

Proof of graduation in the past 2 calendar years or in the next 6 months, and
Proof of current employment.
If an international student or on any other non-immigrant visa, you will need more documentation as discussed above.

Honda Student Discount

Honda is offering a $500 bonus towards any new 2018 or newer model year when financed or leased through Honda Financial Services. There is an option to defer first payment 90 days (60 days interest-free) is only available with traditional financing (not leasing).

To qualify you’ll need:

Verifiable proof of employment (or firm commitment from employer)
Have graduated in past two years or will graduate in next six months
Provide Honda dealer with credit and document requirements
No adverse credit history

Final Thoughts

Leasing or buying a car can be smart if you do it right. Otherwise, it will be a huge waste of money. Take your time, do your research and your math. Know your financial situation and other transportation options available to you before you lease or buy a car.