Leasing vs. Buying a Car: Pros and Cons

Auto

Besides your house, your car is probably the most expensive item you have, at least until you save up enough for that private jet. Consequently, choosing which car to drive and how to finance it is a big decision. Moreover, it impacts how much you’re able to spend in other areas of your life and how frequently you go to the mechanic for repairs.

new car

Most people can’t afford to pay cash for a new car anymore, particularly for a newer model. If that’s you, you’ll need to determine whether you’ll get a car loan or lease it for a few years.

The choice isn’t as straightforward as you might think. The best decision for you depends on several variables, including what kind of car you want, how long you plan to keep it, and how your current cash flow looks. So brush up on the basics so you can be prepared the next time you get ready to purchase or lease a new vehicle.

Buying a Vehicle

When buying a car, you borrow the amount of money you need minus any down payment you make. Then, you repay the auto loan, along with interest, each month for a set number of years.

The average length of a car loan is now up to 5.5 years, so it’s essential to find the best loan to keep your monthly payment as low as possible for that length of time.

Bank or Credit Union Financing

There are a couple of different ways to buy a car with an auto loan. The first is to seek out a lender on your own, whether it’s a bank or credit union. The benefit of choosing this option is that you can shop around for the best offers before heading to the dealership. In addition, you’ll know exactly what loan amount you qualify for and how that amount translates into monthly payments.

Dealership Financing

Your other option is to get dealership financing, where you take out a car loan through the dealer rather than directly through a financial institution. Dealerships typically have access to multiple financial institutions, so they can give you several financing options.

There’s also the added convenience of being able to shop for a car and loan simultaneously, especially outside typical business hours. However, there may be an added finance charge for using dealer financing, so it’s wise to compare all offers before choosing one.

Leasing a Vehicle

When you lease a vehicle, it’s essentially a rental agreement. You’ll make a small down payment, followed by monthly lease payments. None of your payments goes towards principal because you have no ownership of the car.

At the end of the lease, you simply return the car to the leasing company. Additional fees might include mileage charges if you surpass your limit and wear-and-tear fees if the vehicle is left in less-than-prime condition.

One of the upsides of leasing is that you can upgrade to a newer model without worrying about having to sell your old car. The downside is that you don’t have a vehicle to use for trade-in value when buying a new car. In the short term, leasing a vehicle is often less expensive, but it can become more costly over time than buying a car.

Now that you understand the basic mechanics of purchasing a car versus leasing one, let’s compare the pros and cons of each one so you can get a better idea of which might work for you.

Pros and Cons of Car Leasing

One of the most attractive things about leasing a vehicle is that you can often afford a much nicer car for less money than if you were to buy it outright. The required down payment is much less, and you might even be able to find a deal that doesn’t require one.

Compare that to the usual 20% down payment when purchasing a vehicle, and you can save some serious money upfront.

Lower Monthly Payments

You’ll also avoid paying as much in sales taxes. Your monthly payments usually end up being lower because you’re not paying on the full amount of the car’s value—just the depreciation.

You typically receive a factory warranty along with the car, which helps with any repair costs that may pop up during the lease. After a few years, when your lease is up, you can avoid trade-in negotiations or selling your used car and simply lease a new vehicle again.

Lease Requirements

With all the benefits of leasing, why wouldn’t you lease a car? Well, a lease can come with a few negatives. First, you need relatively good credit to qualify for a vehicle lease. And even though you make monthly lease payments, you don’t actually own anything when it’s finished. (Although, you do have the option to purchase the car afterward.)

Over time, continually leasing cars becomes less economical because you’re constantly re-upping contracts with fees and down payments. Not only that, driving a leased car comes with a complex lease agreement. So, you need to make sure you fully understand the fine print. For example, one constraint is mileage limits, which are usually capped at 12,000 miles per year.

You can purchase more miles if you need to, but that adds to your overall cost. You can also be charged wear-and-tear fees at the end of your lease term and early termination fees if you need to end your lease early.

New Car Every Two or Three Years

When you buy a car, you generally get more value from it the longer you hold on to it. However, with leasing, that’s not the case. Instead, you pay about the same price with the same monthly payment, and you get to drive a new vehicle every few years.

Pros and Cons of Buying

There’s no doubt that buying your car outright likely saves you money over time. When it comes time to sell, you will have more flexibility. You can negotiate your trade-in value and put that towards the purchase of a newer car. You also gain flexibility in your use of the vehicle.

Since you own it, you can modify it however you want. Not only that, you don’t have to worry about mileage or wear and tear charges. It’s just like owning a home versus renting one: you don’t have to ask your landlord permission to paint the walls or worry about losing your deposit because of any damage done. Not to mention, at the end of the loan term, there are no more monthly payments. Once the loan is paid, you own it.

Bigger Down Payment

On the flip side, some disadvantages come with buying a car. You may have to put more down, and it can be challenging if you don’t have cash available.

If you’re buying a brand new car with a loan, its value decreases quickly, so you may end up owing more on the loan than your car is worth. That’s a huge consideration to take into account. You may also have a higher monthly payment compared to the lease. Plus, you’ll be solely responsible for repair costs once your warranty ends.

Upfront Costs

Next, let’s look at the upfront costs associated with both buying and leasing. With both options, you’ll have to pay taxes, registration, and other fees that might come along with an auto loan or lease contract.

When buying, you can tack it onto the cost of your down payment. When leasing a car, your down payment might be lower. However, you’ll also have to pay the first month’s payment and security deposit. Make sure you understand all the fees for each option before you decide.

Leasing vs. Buying: Which is right for you?

So which should you do: lease or buy your next car? It’s a very personal decision, but here are a few ways to get you pointed in the right direction. First, consider your credit. What interest rate will you qualify for in both scenarios?

It’s definitely ok to price check both options before choosing one. Next, consider your current cash reserves. How much can you put down on a car? A lease might cost less upfront.

Car Insurance

It’s also essential to consult a reputable auto insurance provider regardless of whether you buy or lease to compare insurance rates.

Long Term Plans

Finally, consider your long-term vehicle plans. Do you need a quick, reliable ride while saving up for a more long-term solution? Or are you ready to invest in something that will last for years and later go towards a trade-in?

Driving Behavior

You should also consider your driving behavior. For example, if you drive for a living, you might feel inhibited by the mileage restrictions of a car lease. Similarly, if you don’t take particular care of your car, you might get hit with some hefty fines. In those cases, buying might be the best choice for you.

Don’t feel rushed in deciding between buying and purchasing. Even if you need a car as soon as possible, both options stick with you for at least a few years, if not more. So give yourself the time to evaluate each type of financing you qualify for.

It’s ok to simply call lenders and leasing companies to ask for estimates based on your personal information. After all, you’re likely going to spend thousands, if not tens of thousands of dollars, on this vehicle no matter how you pay for it. Do yourself a favor and perform adequate due diligence to ensure you’re not wasting money.

Lauren Ward
Meet the author

Lauren is a Crediful writer whose aim is to give readers the financial tools they need to reach their own goals in life. She has written on personal finance issues for over six years and holds a Bachelor's degree in Japanese from Georgetown University.