When you’re in the market for a car, there are several options to consider for how to pay for it, with the two primary choices being lease or buy. Each has its upsides and downsides and factors like how much you use your car and what for, as well as how long you plan to keep your vehicle will help determine whether you are better off going with a lease or just buying.
Leasing allows you to enjoy the use of a car without owning it. In this case, you only pay for the depreciation that occurs over the term of the lease, plus fees and interest. However, there are some reasons why it may make more sense for you to own your vehicle outright by buying it.
Whether you lease or buy, the down payment may be as low as zero, but the lower your down payment is, the higher your monthly payments will be. Also, most leases with zero down payment are only offered to those who have excellent credit.
Lease: You only pay interest on the difference between the capitalized cost (the actual price of the vehicle you've negotiated plus any fees and taxes on the vehicle) and the vehicle’s residual value (what it's expected to be worth at the end of the lease).
Buy: You pay interest on the entire amount of money you borrow, which includes the cost of the car and sometimes add-ons like maintenance plans or warranties.
Lease: Leases have strict mileage limits, which can get expensive. Many leases charge you per mile for every mile you go over the limit; excess mileage charges can be anywhere from 15 to 30 cents or more per mile. While the automakers or dealers dictate the number of miles you can drive per year, they don’t check annually to ensure that you’re under the limit -- so it's up to you to keep track.
The total allowed mileage is calculated by taking the number of years and multiplying it by the number of annual miles allowed. Since this total number of miles is priced into the lease, if you are way under the mileage limit when you return the vehicle, you’ve essentially paid for miles you didn’t use.
Buy: When you own a car, you have no mileage limitations, but if you drive a lot, you may exhaust the warranty early. Nevertheless, if you drive a lot, buying a car often makes better financial sense than leasing.
Because you’re paying for the depreciation that occurs during the term of a lease, monthly payments are usually lower with a lease than they are when you buy and used a financed loan.
This often means that if you lease, you can get a nicer, larger or newer vehicle -- or one with a few extra options on it -- than you would have been able to afford if you were buying. It also means you can save more money by leasing the same vehicle you were considering buying.
Lease: You are not the owner of your car, you just pay for the right to use it, like when you rent an apartment. The vehicle is owned by the company that holds the title, often the automaker itself. If the vehicle is totaled or stolen, the leasing company is paid off, but then you’ll need to go lease or finance another car.
However, most leases do offer you the option to buy the vehicle for a set price at the end of the lease term.
Buy: If you purchase a car for cash, you own it outright, and therefore can do with it as you please. If you’ve taken out a loan, your vehicle’s title will be held by the lender until it is paid off, at which time you own it free and clear.
Lease: In some cases, you only pay tax on the amount you put down and on your monthly payments. In others, you pay sales tax on the entire value of the car just as you would if you were buying it. This usually depends on the state where you buy the vehicle, so check with your dealer.
Buy: Purchasers pay tax on the entire cost of the vehicle minus the value of any trade-in, in most states.
When your lease is up, you simply return the car to the dealership and pay any final fees, including any charges for excess mileage or wear and tear. You can then lease or purchase another car, with little to no hassle. As we mentioned, most leases do offer you the option to buy that car at that time if you've become attached to it or your finances are better suited to owning.
If you own your car, you have to sell it yourself or get a fair trade-in price for it, which may take much longer and involve more work on your part.
Warranty Coverage and Maintenance
Lease: Unless you put a lot of miles on it or lease a used vehicle, the manufacturer's warranty covers it for the entire term of the lease, since that term is just a few years. What's more, some leases even include maintenance such as oil changes and air filters – even tires – as part of the agreement. This gives you a more predictable cost of ownership, reducing unexpected out-of-pocket expenses.
Buy: New-car bumper-to-bumper and powertrain warranties vary in length so depending on how long yours is and how long you plan on owning the car, it's possible your warranty will expire before you sell your car.
Changing Your Mind
When you sign a lease, you’re usually locked into that contract for the length of the lease. When you buy your car, you can keep it for as long as you like. If you decide that it’s just not really what you want – for whatever reason – you can sell it. You can also refinance a loan, but renegotiating a lease is more difficult.
No matter how much you might think changes to it enhance the vehicle’s value, your lease papers state that the car must be returned just as it was when delivered to you, minus normal wear and tear. However, when you own it, you can alter the car as much as you'd like. Your changes may even add value to the vehicle or at least allow you to break even when you eventually sell it.
Lease agreements can have strict limitations regarding where you drive your car and what you can use it for -- particularly commercial use. Because of this, if you’re planning to use your vehicle for anything other than what's considered normal use, be sure to find out beforehand whether it's is allowed.
This is not a concern when you own the car.
To recap, leasing is a great option because it gives you flexibility. This matters if you like to change cars every couple of years, if you would like a nicer car than buying will allow given your financial state or if your needs for a vehicle will change in the near future (like having kids or moving to an area where you'll need all-wheel-drive).
Owning is ideal if you want to keep your vehicle for an extended period of time, if you plan on putting a lot of miles on your vehicle, use it for something that might be prohibited within the terms of a lease contract, such as rideshare driving, or simply like the idea of building up equity in your vehicle that you can then capitalize on later.