Is it better to lease or buy a car? Making the choice between purchasing and leasing a car is not always easy. Buying comes with higher monthly payments but you become the owner of an asset—your car—at the end of it.
Leasing offers lower monthly costs and allows you to drive a vehicle that could be more expensive than what you can buy outright. Nevertheless, you enter into a cycle where you never stop paying for the car.
More people are now choosing to lease rather than get a loan compared to a few years ago, this trend doesn’t look like it’ll be subsiding anytime soon.
A Note: Buying a Car
When you buy a vehicle with a standard car loan, it’s a straightforward process. You borrow money from a bank, credit union, or other lending institution and make monthly payments over a certain period of time. A portion of your payment goes to paying interest on the loan, while the rest is put towards reducing the principal amount.
The rate of interest affects how much you need to pay each month. As you progress along in repaying the principal sum, you effectively build equity until, by the end of the loan term, you own your car outright.
You can keep it for as long as desired and modify or mistreat it without penalty—other than any associated repair costs and potentially lower resale value in the future.
A Note: Leasing a Car
Although car prices have been increasing (reaching a peak of $48,000 in August of 2022), leasing is still becoming a popular choice for many. Despite this, Experian—one of the leading credit reporting agencies—has reported that the percentage of all new vehicles that were leased has dropped during the first quarter of 2022 when compared to 2020 and 2021.
For those looking to drive a new car on a budget, leasing can be an attractive option. The monthly payments tend to be lower than if you were financing the car, but you have to return the vehicle at the end of the lease term.
With increased numbers of people working remotely, mileage restrictions may not present an issue for some shoppers. In fact, they might find that they don’t make use of all the allocated miles that they have already paid for.
The fixed nature of both payments and ownership costs (such as no costly repairs while under warranty) make leasing appealing. Yet, it offers less flexibility when compared to purchasing a vehicle in the event that life takes you in an unexpected direction.
Is It Better To Lease Or Buy A Car? Pros and Cons of Leasing
Weighing up the advantages and disadvantages of each option can help you determine if leasing or buying is the best solution for you. We do this below.
Weighing the Advantages of Leasing a Car
Leasing a car can be appealing due to its lower monthly payments, which are only comprised of the difference between the car’s value when new and its expected residual value at the end of the lease, plus finance charges.
Additionally, it has a range of other benefits such as driving a higher-priced vehicle that one may not have been able to afford otherwise, always having a late-model with active safety features protected by the manufacturer’s warranty, and free oil changes and maintenance.
Furthermore, there can be considerable tax advantages for business owners, and you won’t have to worry about fluctuations in trade-in value or selling your car when it’s time to move on – just drop off the car at the dealer.
Potential Disadvantages of Leasing a Car
While leasing can be advantageous, there are some drawbacks to consider. In the long run, leasing usually costs more than an equivalent loan due to the car’s rapid depreciation.
Additionally, unlike buying a vehicle and keeping it until it’s uneconomical to repair, with leasing you will always have ongoing monthly payments. Other potential downsides include:
- Excess mileage charges if you exceed the limits of your lease contract
- Wear-and-tear fees for poor maintenance
- Costly early termination fees
- Expendable items such as tires can be more expensive to replace on premium vehicles.
Finally, you may have to pay a fee when you turn in the vehicle at the end of the lease.
Leasing as an Alternative to Longer Car Loans
If you’re looking to drive a new car every couple of years and have low monthly payments, leasing might be the better choice than taking out long-term loans. With a loan, it’s easy to get “upside down” quickly, owing more than the car is actually worth for a long period of time.
Additionally, trade-in and resale values are likely to be lower than what you still owe on the loan if you need to get rid of your car early on or it’s destroyed or stolen. When trading in early with longer-term loans, you could end up paying so much in finance charges that—comparatively—it’d be more beneficial to lease instead.
Leasing may come with additional costs, as well as restrictions on mileage, wear and tear, and other limitations. So, make sure to factor those in when making a decision.
The Difficulties in Comparing Car Loans to Leases
It can be tricky to evaluate the differences between a six-year loan and a three-year lease. When the lease ends, the lessee has to find another car or accept the buyout offer, whereas the bank borrower still has three more years of payments.
Leases can be further subsidized with additional rebate offers not available on loans, as well as varying money factor (interest rate) rates – making it near impossible for a fair comparison.
For budget-minded car buyers who don’t want to be tied down by a lease’s limitations, consider opting for a less expensive new car, buying a certified pre-owned vehicle from a reputable dealer, or choosing a longer loan term.
Investing in a car that retains its value, remains reliable, and offers good fuel economy will save you both upfront and in the long run. Alternatively, for even more savings, opt for purchasing a well-maintained used car with cash.
Effectiveness Through Negotiation
Many people wrongly assume that the monthly payment advertised in leasing ads is non-negotiable. However, this figure is usually based on the manufacturer’s suggested retail price, which can be haggled over just like when you’re buying a car.
That said, only those with excellent credit ratings can avail of the best lease deals which may be cheap due to an automaker looking to clear out slow-selling cars.
Is It Better To Lease Or Buy A Car? 10 Common Comparisons
When it comes to buying a car, there are some key differences between leasing and purchasing. Here are ten of the major points:
When it comes to ownership, buying a car means you own the vehicle and can keep it as long as desired.
On the other hand, leasing entails not owning the vehicle and having to return it after the lease period ends, unless you choose to purchase it.
When it comes to up-front costs, buying a car includes the cash price or a down payment, taxes, registration, and other fees.
On the contrary, leasing may involve the first month’s payment, a refundable security deposit, an acquisition fee, a down payment, taxes, registration, and other fees.
Your Monthly Payment
When it comes to monthly payments, loan payments when buying a car are generally higher than lease payments due to the need to pay off the entire purchase price plus interest, taxes, and fees.
Conversely, lease payments are almost always lower than loan payments since you’re only paying for the vehicle’s depreciation during the lease period plus interest charges (called rent charges), taxes, and fees.
Early Termination Penalties
When it comes to early termination, with buying a car you can sell or trade it in at any given time, and the money from such a sale can be used to pay off any loan balance.
Conversely, if you end your lease early there can be costly charges involved, though occasionally the dealership may buy the car from the leasing company as a trade-in, thus relieving you of the obligation to continue with the contract.
Returning the Vehicle
When it comes to vehicle return, when you buy a car you’ll need to handle the sale or trade-in when you decide it’s time for a new one. On the other hand, with leasing you just return the vehicle at the lease end, pay any relevant costs and walk away.
When it comes to future value, when you buy a car the vehicle will depreciate but its cash value is yours to use as you like. When leasing, the future value won’t affect your finances, but this also means that you don’t have any equity in the vehicle.
When you buy a car, you’re free to drive as many miles as you want, though this can lower the vehicle’s trade-in or resale value.
On the other hand, most leases limit the number of miles you may drive – typically 10,000 to 12,000 annually – although you can negotiate for a higher mileage limit. Going beyond your limits will result in additional charges.
When it comes to excessive wear and tear when buying a vehicle you don’t have to worry about this, though it could lower the vehicle’s trade-in or resale value. However, with leasing, you are held responsible for any excess wear and tear. This may result in additional charges.
The End of the Road
If you buy a car, at the end of the loan term you have no further payments and will have built-up equity to help pay for your next vehicle.
On the other hand, at the end of a lease – typically two to three years – you can choose to finance the purchase of that car, or lease or buy another.
Customizing Your Vehicle
When buying a car, you have the freedom to modify or customize it as you please, though doing so could void your warranty.
Conversely, when leasing a vehicle you must return it in salable condition and any customizations have to be removed. In the event of residual damage from such modifications, you’ll be required to pay for any fixes or file an insurance claim and pay a deductible.
Is It Better To Lease Or Buy A Car? Our Final Thoughts
The decision to buy or lease a car depends on a variety of factors and ultimately comes down to personal preference and financial circumstances.
In Defense of Buying a Car
Buying a car can be a good long-term investment, as once you pay off the loan, the car is yours to keep and potentially sell later on.
Additionally, you have the flexibility to customize the car to your liking and drive it as much as you want without worrying about mileage restrictions or excess wear and tear fees.
However, buying a car typically requires a larger down payment and higher monthly payments compared to leasing, which may not be feasible for everyone. Additionally, owning a car means you are responsible for maintenance and repair costs, which can add up over time.
In Defense of Leasing a Car
Leasing a car can be a good option for those who want a newer car with the latest features without the commitment of owning a car long-term. Leasing often requires a lower down payment and lower monthly payments compared to buying, which can make it more affordable for some people.
Additionally, since lease terms typically last 2-3 years, you have the option to switch to a newer car once the lease is up. However, leasing does come with some restrictions, such as mileage limits and fees for excessive wear and tear, which can add up if you drive frequently or are rough on your cars.
Finally, since you don’t own the car, you don’t have the option to sell it or use it as collateral for a loan. All in all, the choice is yours. Unfortunately, this is a subject we can’t go the Gyldi route with, as there are too many factors to properly break down. But hopefully the above has given you enough information to make an informed decision.