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Buying vs. Leasing

How this Guide is Organized
1. Benefits of Leasing
2. Benefits of Buying
3. Drawbacks of Leasing
4. Drawbacks of Buying
Buying vs. Leasing

Getty Images/David McNew

A new car is the second biggest purchase most of us make. Since many shoppers have to finance their new vehicle, deciding whether to buy or lease it can be confusing, especially for first-time buyers. There are many different factors to consider before you decide whether buying or leasing is better for your budget and lifestyle.

Benefits of Leasing a Car

By leasing a new vehicle, many shoppers are able to get more car for less money. The car’s monthly payments are typically lower because you’re only paying for the future depreciation of that vehicle, and not the actual sales price. For example, on a $30,000 car, you’d finance the entire $30,000 purchase price with a car loan. With a car lease, you only pay a percentage of that. The car’s predicted future value is what it is expected to be worth at the end of the lease, which is its residual value. The residual value is subtracted from the purchase price and what’s left over is what you make payments on. So if the car’s residual value is 55 percent after three years, for example, that means the $30,000 car would be worth $16,500 at the end of the lease. You’d make lease payments on the remaining $13,500 and not the full $30,000, plus interest, taxes and fees.

If you only have a small down payment saved up, leasing may also be better for you. Many car leases require anywhere from $0 to several thousand dollars up front, though the down payment is negotiable. Many advertised lease offers will promote low payments, but require a sizeable down payment. If you want to put as little down as possible, remember that your monthly lease payments will be higher.

Many leases last about three years, which is typically the length of many new-car bumper-to-bumper warranties. As a result, the car is usually covered under warranty for repairs for the duration of the lease. You still need to maintain the car, though, which includes oil changes, tire rotations and recommended maintenance from the manufacturer. Failure to properly maintain the car during the lease can result in fees when you turn the car in at the end of the lease.

If you enjoy having the newest high-tech features, leasing could be better for you. Since you’d be leasing every few years, each new car you lease will have the latest and greatest technology and safety features. If you’ve fallen in love with your leased car and want to keep it, you can generally buy it at the end of the lease by paying cash or by taking out a car loan to finance the balance.

Benefits of Buying a Car

If you want to keep your vehicle as long as possible, buying is probably better for you. When you buy, you own the car when the loan is paid off. Until the loan is paid off, the lender owns the vehicle. As you continue to make loan payments, you’re gaining equity in the vehicle.

Some auto loans specify that you cannot alter the vehicle in any way until the loan is paid off. Once you have the title to the car, you can do whatever you want with it, like change the paint color, add bumper stickers, add a new audio system, alter the suspension or upgrade the wheels and tires, though many times you can alter the vehicle before you have the title.

One of the biggest benefits that buying has over leasing is that there are no mileage restrictions. If you have a long commute or do a lot of driving in general, buying is most likely better for you.

Drawbacks of Leasing a Car

Automotive lease contracts limit the number of miles you can drive. These mileage restrictions typically are 9,000, 12,000 and 15,000 miles a year. You need to estimate how many miles you drive per year so you can determine how many miles to purchase. If you go over that amount, you’ll pay a fee per mile at the end of the lease when you turn the car in. These overage charges can be very expensive.

With leasing, you can sometimes make minor alterations to the vehicle that can be reversed before you turn the car back in, but you generally can’t make any major alterations. Make sure you read the lease contract carefully before signing. 

Another drawback is that when you lease, you’re really just renting the car for a few years and paying interest to finance that car over a specified period of time. The lessor (lender who owns the car and is leasing it to you) earns money off the interest you’re paying. Dealers sell cars coming off lease as used cars or certified pre-owned cars. Because leased cars have strict rules about mileage and maintenance, they’re typically in very good condition at the end of the lease. Unfortunately, you don’t get anything for all the hard work you put in to the car to maintain it and keep its mileage low. Since you’re basically renting the car when you lease, you’re not building any equity. This is similar to renting an apartment versus buying a condo or house.

Another potential downside to leasing is that usually only shoppers with good credit scores will qualify for a car lease. If your credit score is less than perfect, you may want to consider buying a used car or waiting to lease until you can clean your credit up and increase your credit score.

Drawbacks of Buying a Car

When you buy a new car, you roll the dice a bit with its resale value. It’s hard to determine what the vehicle will be worth when you’re ready to trade it in or sell it. With leasing, that future value is predicted up front and put in writing on the contract. If you look at the car’s residual value that’s used to calculate a lease on it, this will help you determine what it will be worth after a few years if you plan on buying. Sometimes, a buyer will owe more on the car loan than the car is currently worth, which is known as being upside-down on the loan. This is only a drawback if you plan on selling it or trading it in. This makes it more difficult to get out of the car because you’ll have to come up with the extra money just to sell it.

Another potential drawback of buying is a sizeable down payment. Many lenders require about 10 to 20 percent down when taking out a car loan. On a $30,000 vehicle, this is $3,000 to $6,000. This can vary based on many factors, though, including your credit score, income, level of debt and more. If you’re not able to save up a sizeable down payment, consider waiting to buy, buying a cheaper car, buying a used car or leasing a new car.

One other downside of buying is that for some people’s budgets, lower monthly payments are a must-have. To get the monthly payments down to a smaller amount, lenders can stretch the car loan out longer. Auto loans can last five, six or even seven years. Remember that you’ll typically pay more in interest the longer you pay on the loan, so if you can pay it off early or take out a shorter three- or four-year loan, you might be able to save some money. A larger down payment will also help lower your monthly payments when you finance.

Make sure you sit down with a calculator and consider your budget, driving needs, lifestyle and credit history before you decide whether to buy or lease. There are auto lenders who can provide you with financing that works best for you, no matter whether you decide to buy or lease your next vehicle.

Related:

How to Finance a Car and Get a Car Loan

How to Negotiate the Best Price on a New Car

How to Buy a Used Car