A car is a sizable investment. When you’re 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. These include usability as well as how long you plan to keep your vehicle. It's important to weigh all of your lifestyle choices first to help determine whether to buy or lease.
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 you are asked to make upfront may be as low as zero, but the lower your down payment is, the higher your monthly payments will be, which adds to your total monthly costs. Also, most leases with zero down payment are only offered to those with excellent credit. If your credit is less than ideal, you will pay more whether you buy or lease as far as interest rates. And if your credit is truly horrible, you may not qualify for a lease or a loan without making a sizable down payment.
Lease: With a car 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). 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 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 finance a car. Want a lower loan payment? Pay more down. The more you pay down, the less you owe, and the lower monthly payments will be. Lower it even more 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 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 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. 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 shorter commitment offered by your lease.
- 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. Until then, your lender will retain a lien against your vehicle.
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.
Lease: Although it can vary widely between dealerships, many leased vehicles come with insurance automatically, so you don’t have to worry about it.
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 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.
Gap insurance, whether required or not by the dealership or lender, is also a consideration when leasing or financing. This type of auto insurance kicks in if your car is “totaled” and your insurance limits don’t cover the remaining balance due on the car, which means that your loan is "upside down." 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.
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 it.
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 allowed.
This is not a concern when you own the car.
To recap, leasing is a great option because:
A leased car gives you flexibility.
You can change cars every couple of years, if you would like a nicer car (or a new vehicle) than given your financial state or if your needs for a vehicle change (like having kids or moving to an area where you'll need all-wheel-drive).
Your down payment is likely lower, as are your monthly lease payments.
Maintenance costs and repair costs are typically less 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.
Still, financing a car is a good bet if:
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.
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.