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.
So, should you buy or lease? 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.
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 vehicles, although you may be able to get a lease on a used vehicle as well.
The difference between the vehicle’s capitalized cost (initial price) and residual value (its value when the lease ends), 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 12 to 25 cents per mile). The annual mileage cap may be higher or lower depending on your lease’s terms, and cap can impact your monthly payments.
When your lease ends, you’ll need to return the vehicle. 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.
The pros and cons of leasing a car
Leasing a car isn’t for everyone. Consider the advantages and disadvantages of leasing:
- You may not have to pay a large down payment. In fact, you may want to put as little down as possible, 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 bought similar vehicles.
- The vehicle may be under warranty for the entire lease period. Newer vehicles are also less likely to need repairs.
- The lease agreement could cover basic maintenance, like oil changes and tire rotations.
- You won’t have to deal with selling a vehicle later.
- You may not have to pay sales tax on the vehicle’s entire value.
- After the lease ends, you won’t own the vehicle.
- You’ll still have to buy auto insurance, and premiums may be higher for new and luxury vehicles.
- You’ll also want to have gap insurance, which covers the remainder of your lease payments minus what your insurer pays if the vehicle is stolen or totaled. Although, some leases include gap insurance.
- You’re limited in how many miles you can drive 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.
- Ending your lease early could result in an expensive early termination fee.
Leasing vs. buying a car — should you lease a car?
Leasing can work for some people, while buying may be better for others.
Those with poor credit or a limited budget may be better off with a lease’s relatively lower monthly payments and down payment. However, sometimes a lease can require better credit than an auto loan. (Learn how to rebuild your credit.)
Leasing could also be a good idea if you always want to have a new vehicle and hate dealing with maintenance or being outside a warranty period. But make sure you won’t drive 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 as an auto repair fund.
You may be able to save money on the down payment, monthly payments, and overall cost by buying a slightly used vehicle. Many vehicles depreciate a lot in the first couple of years, but they still have a long life ahead of them.
Whether you buy or lease and get a new or used vehicle, be sure to keep an eye on the overall cost (not just the monthly payment) and negotiate before signing. You can also find lease vs. buy calculators online, which you can use to estimate your total and annual cost for each option.