• Buying Guides

Lease vs Buy a Car - Which Is Better?

By Evan Walton | November 3, 2021

A car is a sizable investment for the majority of the population. When you are in the market for a car, there are several options to consider, with the two primary choices being leasing or buying.

Each option has its benefits, drawbacks, and factors to consider. These options include usability as well as how long you plan to keep your vehicle. It is important to weigh all of your lifestyle choices first to help determine whether buying or leasing is best for you.

Leasing a vehicle allows you to enjoy using a car without owning it and provides you an outlet for trading up at the end of your lease. In this case, you only pay for the depreciation that occurs over the term of the lease, plus fees and interest.

However, there are a considerable amount of reasons why it may make more sense for you to own your vehicle outright by buying it; beginning with monthly cost considerations.


Quick Look:

Reasons to lease:

  • A leased car gives you the flexibility that car buying does not.

  • Leasing allows you the opportunity to change cars every couple of years, if you would like a nicer car, new vehicle, financial changes, having kids, or moving to an area where you will need all-wheel-drive (AWD).

  • Your upfront cost is likely lower, as are your monthly lease payments.

  • Maintenance costs and repair costs are typically less for a leased vehicle since most leased vehicles are covered by warranty still.

  • Lease deals may be available, such as rebates, to offset your initial or ongoing costs for both used cars and new cars.

  • Early termination fees and loss of security deposit are possible if you attempt to leave your lease agreement early for any reason.

  • The first month's payment, down deposit, acquisition fee, and all taxes, title, and licensing fees are due upfront in cash and are not wrapped up within a loan.

Reasons to buy/finance:

  • You want to own the car at the end of the lease/loan term and are banking on its resale value.

  • You get a special deal on financing from your bank or credit union.

  • You plan to keep the vehicle for an extended period.

  • You plan to put a lot of miles on the car.

  • Your credit score prevents you from leasing the car you want.

  • The vehicle will be used for activities that are prohibited by most leases, such as driving for a rideshare company.

Biggest difference: Higher monthly payments when you buy

In sum, the biggest difference between leasing a car and financing a car boils down to who you want the owner to be at the end of your lease/auto loan. Both have distinct advantages and pitfalls, so weigh your situation to determine which fits your life best.


Differences to Consider:

Down Payment

Whether you choose to lease or buy, the down payment you are asked to make upfront will dictate how much you pay on a monthly basis. Your down payment may be as low as zero, but the lower your down payment is, the higher your monthly payments will be.

The majority of leases that are offered with a zero down payment are offered to consumers with good to exceptional credit with credit scores that range from 670-850. If your credit is less than ideal, you will pay more in interest rates over the duration of the lease or purchasing loan.

If you have poor credit 300-579, you may not qualify for a lease or a loan without making a sizable down payment.

Interest

Lease: With a car lease, you pay interest on the difference between the capitalized cost (the actual price of the vehicle you have negotiated, plus any fees and taxes on the vehicle) and the vehicle’s residual value (what the vehicle is expected to be worth at the end of the lease). This interest charging process is known as the money factor. As mentioned above, if you have damaged credit, you can expect your interest rate to be higher than customers with good credit.

Buy: You pay interest on the total sum of money you borrow, which includes the cost of the car and sometimes add-ons like maintenance plans or warranties. Your credit score plays a major role in what interest rate you will be offered when purchasing a vehicle and what your loan payment will be.

Mileage

Lease: Lease contracts have strict mileage limits, which can get expensive if you exceed the agreed-upon mileage. Many lease agreements 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 mileage restrictions, they do not check annually to ensure that you are under the limit which leaves all the responsibility on you to keep track.

The total allowed mileage for leasing 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 under the mileage limit when you return the vehicle, you have essentially paid for miles you did not use.

Buy: When you own a car, you have no mileage limitations, but if you put a lot of miles on the vehicle quickly, you may exhaust the factory warranty early. Nevertheless, if you drive a lot, buying a car often makes better financial sense than leasing.

Monthly Payments

Lease: Because you are paying for the depreciation of the leased vehicle that occurs during the term of a lease, monthly payments are usually lower with a lease than they are if you finance a car. If you desire low monthly payments you simply have to put more money down. The more money you pay down, the less you owe, and the lower monthly payments will be.

You can your monthly payments even lower by making sure your credit is in tip-top shape prior to applying for a lease or a car loan, as your credit will affect your interest rate, and thus, the payment required.

Keep in mind that, as a lessee, you can often get a nicer, larger, or newer vehicle, or one with a few extra options, 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.

Ownership

Lease: In a lease you are not the owner of the car you have leased; you are paying 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 will need to lease or finance another car.

Most leases offer you the option to buy the vehicle for a set price at the end of the lease term. This can be a good way to “try before you buy” to make sure that the car is one that you actually want to own while enjoying a short-term commitment offered by your lease.

Buy: If you purchase a car with cash, you own it outright and therefore can do with it as you please. If you have 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.

Until then, your lender will retain a lien against your vehicle. The majority of ownership decisions are based on accessibility to lines of credit.

Sales Tax

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 are leasing the vehicle, so check with your dealer.

Buy: Purchasers pay tax on the entire cost of the vehicle minus any trade-in value, in most states.

Car Insurance

Lease: Although it can vary widely between dealerships, many leased vehicles come with insurance automatically. If your chosen dealership does not offer insurance, however, it is your responsibility as the lessee to acquire adequate insurance for the leased vehicle. You will also want to inform your insurance company that the vehicle is in fact a lease.

Buy: When you finance a car, your lender will expect and demand that you keep auto insurance on the vehicle until the lender is paid the full purchase price plus all interest. Although it varies by state (and perhaps by the lender), you will likely need to purchase collision and comprehensive insurance coverage on your financed vehicle.

Whether required or not by the dealership or lender, gap insurance is a consideration when leasing or financing. This type of auto insurance kicks in if your car is “totaled” and your insurance limits do not cover the remaining balance due on the car. When this happens your loan becomes "upside-down" meaning you owe more than what the vehicle is now worth.

In effect, gap insurance fills in the gap left between what you owe on your car and what your insurance company is willing to pay for your claim.

Trading In

Lease: When your lease agreement term is up, you can simply return the car to the dealership and pay any final fees, including any charges for excess mileage or excessive wear. You can then lease or purchase another car, with little to no hassle. As we mentioned, most leases offer you the option to buy the car you had leased at that time.

Buy: If you own your car, you have to sell it yourself or attempt to get a fair trade-in price from a dealership for the vehicle to obtain your next car.

Warranty Coverage and Maintenance

Lease: Unless you put a lot of miles on the leased vehicle or lease a used vehicle, the manufacturer's warranty covers the vehicle for the entire term of the lease. Some leases even include maintenance such as oil changes, air filters, and even tires as part of the lease 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 is possible your warranty will expire before you sell your car.


Other Considerations

Changing Your Mind

When you sign a lease, you are 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 the vehicle is not what you want, you can sell it. You can even refinance your auto loan, but renegotiating a lease is more difficult.

Customization

No matter how much you might think changes to a leased vehicle enhance the vehicle’s value, your lease papers most likely state that the car must be returned just as it was when delivered to you, minus normal wear and tear. However, when you own a vehicle, you can alter the car as much as you would like. Your changes may even add value to the vehicle or at least allow you to break even when you eventually sell it.

Usage Restrictions

Lease: Lease agreements can have strict limitations regarding where you drive your car and what you can use it for, particularly commercial use vehicles. Because of this, if you are planning to use your vehicle for anything other than what is considered normal use, be sure to find out beforehand whether it’s allowed.

Buy: This is not a concern when you own a car.