The advantage of financing a car is that eventually you'll pay it off and enjoy debt-free car ownership. That's why buyers are willing to pay more per month to own than to lease.
But many car owners have veered off course. A third of those who come to a dealership with a car to trade in owe more on it than it's worth: $5,143, on average. And so rather than reaching the promised land of car ownership, they wind up wandering in the desert of negative equity.
People are getting out of their loans early for a number of reasons, many of them understandable: The compact car that was once perfect for commuting doesn't cut it when a baby unexpectedly joins the family. A hasty or poorly researched purchase brings on a bad case of buyer's remorse, followed by a decision to get something better — right now. But switching cars on the fly has financial consequences.
If you consistently switch cars after three or four years but you always finance for five or six, it may be time to change direction. If what you really want is a low monthly payment and the freedom to swap cars after two or three years, you should be leasing.
HOW WE GOT HERE
Much of the trouble with car buying stems from the fact that automobiles have gotten more expensive. So, monthly payments have gone up, too. They now average $512 for new cars. In an effort to keep the payments manageable, buyers are stretching out their car loans. In 2017, loans hit a record-high average of 69 months. In fact, more than 27 percent of buyers chose loan terms from 73 to 84 months.
Many buyers, however, never reach the end of those loans. Instead, they trade in early, despite owing more on the car than it is worth. When buyers roll that trade-in's balance into the new car's loan, they often sign up for a loan with an even longer term. That can be the beginning of a debt cycle that's hard to escape.
THE LEASING OPTION
By contrast, a lease that's done right requires little or no money down, a short term of "ownership" and significantly lower monthly payments. Here's a comparison, based on the 2017 Honda Civic.
The average monthly purchase payment for a Civic was $388, according to Edmunds data for the first half of 2017. The average lease payment was $266. That's 31.5 percent less for leasing.
Now imagine you bought that Civic with the intention of paying it off, but you changed your mind and traded it in after 36 months of a 69-month loan.
At that point, you would have paid $13,968 on the car. You would only have paid $9,576 if you had leased. The money you saved by leasing would likely be much more than any equity you would have built up after three years of car payments.
USED CARS: NOT A SURE CURE
You might think the solution is to buy used. Not always. The purchase price may be lower, but on average, it takes 67 months to pay off a used car. That's comparable to the term for a new car. Further, if you buy a 3-year-old car and keep it until it is paid off, you're the owner of a 9-year-old car, which means some costly repair bills could be looming.
There are financial experts who will tell you that buying a $5,000 used car for cash is the smartest move to make. What they don't tell you is that a cheap car can quickly turn costly, requiring new tires, preventive maintenance and, eventually, repairs. If you're a seasoned do-it-yourselfer, hats off to you. But keeping up an old car isn't for everyone.
A BETTER PATH
Many people naturally gravitate toward car buying because it's what they've always done. Some view leasing as a complex thing "that business people do." Now may be the time to examine the buying habit. Before you sign a purchase contract, do these things:
— Ask yourself if you can really afford the new or used car you're considering. Don't forget to factor in the cost of insurance, maintenance and gasoline.
— Make certain this is the car you need, not just the one you want. Impulse buying can lead to early, and costly, trade-ins. Test-drive more than one car and don't rush the decision.
— Resolve to keep the car until you pay it off, or longer.
— Consider a lease, particularly if you have any doubt about your ability to ride out a car loan. Look for one with low monthly payments. Edmunds lists cars with lease payments around $199 every month. It's best to put very little or nothing down.
EDMUNDS SAYS: Compare leasing and buying carefully. Pick the option that works best, not just for now, but for the years to come.
This story was provided to The Associated Press by the automotive website Edmunds . Ronald Montoya is a senior consumer advice editor at Edmunds. Twitter: @rmontoyaedmunds. Matt Jones also is a senior consumer advice editor at Edmunds: Twitter @supermattjones.
Edmunds: How Much Car Can I Afford? http://edmu.in/2mXMxvz
Edmunds: How Long Should My Car Loan Be? http://edmu.in/2uZnNr