Leasing vs. Buying a Car: Which Is Right for You?
The answer is: it depends. Our financial experts' insight on whether leasing vs. buying is right for you, will help you make the best decision for you.
Buying a car is very similar to buying a home. If you’re taking out a loan, the lender holds the title until the loan is paid off, and when you want a new one, you can sell it. “The only real difference is, while a home will typically appreciate in value, your car’s value is going to depreciate, which, depending on circumstances can make leasing vs. buying a car more attractive,” says Richard Best, a writer for Dontpayfull.
When you lease a car—much like leasing a home—you make monthly payments to the owner for the duration of the lease, which, for a car, usually runs from two to five years. Your lease payment is not based on the full value of the car; rather, it is based on the value you use over the term of the lease. The lessor will calculate a residual value, which is the value left in the car when your lease is over; you don’t pay for that. The higher the residual value of the car, the lower your lease payments. That’s why monthly lease payments are usually lower than monthly car loan payments. However, unlike leasing a home, where the landlord is responsible for maintenance and repairs, the dealer does expect you to not only return the car in good condition but also to pay for any needed repairs at that time. The good news, is, with a three-year lease, your car is likely to be under warranty. Realize too, that you can’t depend on car dealers to tell you everything you need to know about leasing.
The pros of buying a car
One of the big pros when it comes to leasing vs. buying a car is that when you buy a car, it’s yours for good. If you’re not buying the car up front in cash and are opting for a loan instead, those monthly payments vanish once the loan is paid in full. Furthermore, your credit doesn’t have to be stellar. “However, drivers with good credit are rewarded with lower interest rates on their car loans,” says Alissa Todd, financial advisor at The Wealth Consulting Group.
If you will likely drive more than 20,000 miles per year, you probably have no choice but to buy, making it a no brainer to decide on leasing vs. buying a car. Truth is, points out Richard Reina, automotive expert for CARiD.com, “If you are responsible and diligent about maintenance, a modern car can typically be kept for seven to eight years and/or 100,000 miles.” There are many things you can do to keep your car maintained.
Another plus to buying a car is that you’re in control as to when you want to replace a vehicle, says Joseph Conroy, a certified financial planner and author of Decades & Decisions: Financial Planning At Any Age. You don’t have to wait until the end of the lease to get a new car and, on the flip side, you aren’t forced to make a decision every three to five years. Remember when buying a car, don’t dismiss the option of taking a look into one of the best cars to buy used.
The cons of buying a car
If you don’t have money for a down payment, you may be looking at high monthly payments, almost always higher than the monthly payment on a leased vehicle, says Chelsea Hudson, a personal finance expert at TopCashback. “Post-warranty repair costs are not covered and fall on the buyer to pay for and trading or selling your vehicle is your responsibility,” she says.
The pros of leasing
There are some upsides to leasing vs. buying a car, says Joshua Zimmelman, president of Westwood Tax & Consulting. “You can upgrade to a new car as often as you like, never have to deal with the process of selling a car, you don’t even have to deal with the hassle of a trade-in, and repairs are usually covered by warranty,” he says. It’s less expensive to lease vs. buy, and you might even be eligible for a tax break (depending on your state and other factors).
If you must have the latest and greatest, lease vs. buy is no real dilemma. Switching up is ideal for tech lovers. “Leasing a car can be a great option for those that enjoy the latest technology in their vehicles,” says Matt Smith, senior editor at CarGurus.com.
The cons of leasing
One of the biggest cons of leasing is that you’ll have to stay within a set mileage range per year, usually 12,000 to 15,000, or risk paying mileage overages at the end of the lease. “For example, most leases have an annual mileage cap of 15,000. If at the end of a three-year lease, you return the car with 50,000 miles, you will pay a per mile rate on the 5,000-mile overage,” explains Best. “A typical per mile rate is $0.15 per mile, so that would cost you an extra $450.”
Another downside is that at the end of your lease term, you’ll have nothing to show for two to five years of monthly payments.
Lastly, “In order to get a lease you’ll need a good credit score,” Zimmelman says, plus, you might even need to get extra auto insurance.
How long do you plan to keep the car?
“In most cases, people that don’t plan to hold on to the car longer than six years will do better by leasing rather than owning,” says Lou Haverty a chartered financial analyst with Financial Analyst Insider. “This is because leasing generally includes lower monthly rates than a standard loan for the same vehicle, and a standard loan doesn’t usually make up that difference until the sixth or seventh year,” he says. “If you’re a short-term car owner and can stay within your annual mileage limits, you’re probably better off leasing.”
Do the math
Many people don’t understand how much they’re paying to lease because they don’t understand how to compare the rates they’re offered, says Sonia Steinway, president of Outside Financial.
“The best way to compare loans is by using the annual percentage rate or APR. For leases, the best way to compare is with the money or lease factor. The money factor is just the annual interest rate divided by 2400. The reason that leases are calculated differently than loans is because a lease is really two different loans: one including interest over the length of the lease, and one for the residual amount remaining at the end of the lease period,” Steinway explains.
For example, if the APR on the loan part of the lease is 8.5 percent, you would divide that by 2400 to get a money factor of ).0035. “Dealerships aren’t required to disclose the money factor, although all of the info needed to calculate it does have to be disclosed. Unfortunately, most consumers don’t do the math required (total rent charge divided by lease term in months, divided by adjusted capitalized cost, plus residual value),” says Steinway.
Know what to expect if you break your lease
There are ways to break a lease with no impact on your credit, but it could get expensive. “For example, you could transfer the lease, buy the vehicle, or do an early termination and pay the penalties,” says Valerie Coleman, a car expert with 5miles. “Bottom line: you owe the dealership for the value of the car when you signed the lease.”
Lease vs. buy: which is better
Truth is, it’s no right or wrong answer to the debate about leasing vs. buying a car. It’s a personal decision. Do keep in mind how much money you have to put toward a vehicle and how much money you have to maintain a car, your credit score, the miles you’ll drive each year, how hard it might be to keep your car in good condition and how long you may want to keep the car.
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