Leasing a car could require less money down and lower monthly payments than purchasing. Plus, you might be able to drive a newer or more luxurious car than you could afford otherwise. Sounds good.
However, leasing isn’t for everyone. From a purely financial perspective, buying a car—or, even better, buying a used car—and running it into the ground is likely the least expensive long-term option.
Understanding how you plan to use the vehicle and the differences between leasing and buying can be essential in deciding which option is best for you. Here's what you need to know about a lease vs. buying a car:
How Does Leasing a Car Work?
A lease is often a two- or three-year contract during which you make monthly payments in exchange for being able to use the vehicle. Leases are generally for new cars, although you may be able to get a lease on a used car as well.
The difference between the vehicle’s capitalized cost (initial price) and residual value (its value when the lease ends, accounting for depreciation), plus interest and fees, will determine your monthly payments. You may also have to pay a security deposit and taxes when you begin the lease.
Often, the monthly payments for leasing a vehicle are lower than auto loan payments for the same vehicle. You can also negotiate the cap cost, interest rate (called the money factor), and fees to try and bring down your monthly payments even more.
But you’ll have an annual mileage limit — often 10,000 to 15,000 miles — and if you exceed this, you’ll have to pay a per-mile fee (such as $0.12 to $0.25 per mile). The annual mileage cap may be higher or lower depending on your lease’s terms, and the cap can impact your monthly payments.
At the end of the lease, you’ll need to return the vehicle and you may have an option to buy it at this point. Otherwise, you might want to buy or lease another vehicle. If you paid a security deposit at the start of the lease, and the vehicle is still in good condition, you’ll receive the deposit back from the leasing company.
The Pros and Cons of Leasing a Car
Leasing a car isn’t for everyone. Consider the pros and cons of leasing:
- You may not have to pay a large down payment upfront. In fact, you may want to pay as little down as possible to the lender, as a large down payment might not save you much money overall and if the leased car is stolen or totaled, you won’t get it back.
- You get to drive newer vehicles and make lower monthly payments than you’d have to pay if you finance your next car outright.
- The vehicle may be under warranty for the entire lease period. Newer vehicles are also less likely to need repairs, meaning less hassle overall.
- The lease agreement could cover basic automotive maintenance, like oil changes and tire rotations.
- You won’t have to deal with selling a vehicle later, a huge perk for those that want to avoid hassle at the dealership.
- You may not have to pay sales tax on the vehicle’s entire value.
- After the lease ends, you won’t own the leased vehicle.
- You’ll still have to buy auto insurance, and premiums may be higher for new and luxury vehicles.
- You may want to have gap insurance, which covers the remainder of your lease payments minus what your insurance company pays if the vehicle is stolen or totaled. Although, some leases include gap insurance.
- You’re limited in a set number of miles you can drive throughout your lease term without paying expensive per-mile fees.
- You may still have to pay for excessive wear and tear to the interior or exterior of the vehicle— if that wear and tear is enough to impact the resale value of the car.
- Ending your lease before the end of the lease term could result in an expensive early termination fee.
Leasing vs. Buying a Car — Should You Take on a Car Payment or Car Lease?
Leasing can work for some people, while buying may be better for others.
Those with a lower credit score or a limited budget may be better off with a lease’s relatively lower monthly payments and down payment compared to a car loan. However, sometimes a lease can require better credit than an auto loan.
Leasing could also be a good idea if you always want to drive a new car every few years and hate dealing with maintenance costs or being outside a warranty period. But make sure you won’t go over the annual mileage limit, as the fee can add up quickly.
Buying can be a wise financial decision in the long run if you plan to drive your vehicle for many years. While buyers may need to budget more for their monthly payments, they also have an asset to show for it and get to keep the vehicle once it’s paid off. It may not be under warranty any longer, but you can set aside part of what you’ve been paying for any potential auto repairs in the future.
You may be able to save money on the down payment, monthly payments, and overall cost by buying a slightly used car over a new vehicle. Many new vehicles depreciate a lot in the first couple of years, but they still have a long life and good resale value if you want to use it as a trade-in later.
Whether you lease or buy a new or used vehicle, be sure to keep an eye on the overall pricing (not just the monthly payment) and negotiate upfront before signing. You can also find lease vs. buy calculators online, which you can use to estimate your monthly lease payments and overall costs across your loan term.