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Deciding between leasing or buying a car depends on your financial situation, driving habits, and long-term goals. Leasing offers lower monthly payments and access to new models, while buying provides ownership and long-term value. This guide explores the pros and cons of each option to help you make an informed choice. We’ll look at the differences between leasing and buying, the costs involved, and how to decide which is best for you.
Buying vs. Leasing a Car: Major Differences
While you end up behind the wheel in both scenarios, buying and leasing a car are very different.
How Buying a Car Works
When you purchase the car outright, you are buying a new vehicle or trading in another car you own for a new one, taking out a loan, paying cash, or a combination.
What Payments Are Based On
With a car loan, you borrow money from a bank, credit union, or other lending institution and make monthly payments for a number of years. If you take out a loan to buy a car, you’ll follow a car loan amortization schedule where you pay both principal and interest over a fixed period of time (usually up to 84 months).It’s important to note that if you borrow money to buy the car, that means the lender, not you, owns the car until you make your final loan payment.
How Leasing a Car Works
With a lease, you have the car for a certain period of time (usually 24 to 48 months). At the end of that period, you can surrender the car to the company you leased it from or buy it through a purchase option.
What Payments Are Based On
With a lease, buyers make monthly payments to drive the car for a set term. That payment is often less than the monthly cost of financing a new vehicle — but of course, buyers must return the car at the end of the lease term if they don’t extend the lease.
Leasing vs Buying a Car Pros and Cons
Here’s a summary of key differences in leasing vs. buying a car.
Buying
Leasing
Ownership
Car is yours once your loan is paid off.
You must surrender the car at the end of your lease term.
Monthly Payments
Higher than leasing, since you are paying off the full car value.
May be lower, making it more affordable. However, you won’t have ownership at the end.
The benefits and drawbacks of buying a car will depend on the type of situation that best suits you. But before you can answer the question, “Is leasing a car worth it?” you should at least consider what buying one looks like.
Pro: You Own the Car Once You’ve Paid Back the Loan
Depending on the car loan terms you get, you could pay your car off in just a few years, and then it belongs to you. You can keep it for as long as it runs, trade it in for another vehicle, or sell it. That’s not the case with a lease.
Pro: You Can Refinance for a Better Rate
When you’re considering whether to lease or buy a car, think about the interest you pay. With a car loan, you’re locked into a certain rate. However, should rates go down or if you qualify for a lower rate, you could refinance your car and pay less. You can’t do that with a lease.On the other hand, refinancing an auto loan with bad credit may result in you paying more in interest over the long run. Though you could lower your monthly payment, look at what you’ll pay over the whole life of the loan before you decide.
Pro: You Have No Mileage Restrictions
Unlike with a leased car, a car you bought can be driven to your heart’s content. Hello, road trips! If you have a lengthy commute for work, you won’t have to calculate how long you can make that trip before excess mileage fees kick in.
Con: It Deteriorates in Value Quickly
As they say, your car loses value the second you drive it off the lot. When you decide to sell it, you’ll typically get much less than you paid for it. And you could find yourself with an upside down auto loan, which means that you owe more than the car is worth.
Con: You’re Stuck with the Loan Until You Pay It Off
If the day comes when you find you can’t afford your car loan, your options will be limited.You could consider getting someone else to take over your auto loan, though the process isn’t a simple one.You may be best off limiting the time during which you’re paying back the loan as much as you can. When shopping for a car loan, consider the shortest period you can afford to repay the loan so you pay less in interest.
Con: You’re on the Hook for Maintenance
While many car leases have warranties, if you buy a used car and something goes wrong, you’re responsible for getting it fixed and covering those costs. Consider how much the average repair is for a car you want to buy. High-end vehicles will typically have higher repair costs.
Con: Higher Down Payment
In most cases, you'll make a higher down payment and somewhat higher monthly loan payments (if you finance your purchase) compared to lease payments for the same car.
Pros and Cons of Leasing a Car
So, is leasing better than buying, then? Whether it’s a short-term lease or a longer one, there are still more factors to consider.
Pro: Your Monthly Payments May Be Lower
Typically, a car lease has a lower monthly payment than a loan since you aren’t buying it outright, but rather “borrowing” it for a few years. That’s great if you have a limit for what you can spend.
Pro: At the End of the Lease, You Have Options
If you love driving newer cars, with a lease you can get a new leased vehicle each time your old lease ends. You also have the option of buying your vehicle outright. Knowing its history, you can be assured that it’s been treated well.
Pro: The Car is Always New(ish)
When you buy a vehicle, you might keep it for 10 or more years to get the value out of it, but that means you risk it breaking down. Since leases are usually not longer than four years, there’s less likelihood that your car will break down, and if it does, it’s likely covered by a warranty.
Pro: Not Worrying About Maintenance
Many new cars offer a three-year warranty. Therefore, if you take out a three-year lease, most repairs may be covered. Leasing could eliminate some significant expenses.
Pro: Not Worrying About Reselling
When the time comes, you return the car — unless you choose to buy it. You don’t have to fret over resale value.
Pro: Maximizing Tax Deductions
If you use your car for business purposes, a lease may provide you with more tax deductions than a loan. The Internal Revenue Service permits you to deduct both the depreciation and the financing costs, which are part of the monthly payment.
Pro: Less Money Down
You put less money down when you lease a car. Some people may make a sizable downpayment if they intend to buy the vehicle at the end.
Con: You Might Be Penalized for Early Payoff
It’s not always the case, but if you want to end your lease early and pay it off, there may be a penalty fee, which is not necessarily the case when you’re paying down your car loan faster. Read the fine print before signing a lease to understand all the fees and penalties you might have to worry about.
Con: You Have No Asset
At the end of the lease, you have no asset to show for the years you’ve paid for your car. If you want to buy a car next, you won’t have a vehicle to trade in, so you’ll have to pay (or borrow) the full amount, which can be expensive.
Con: You’re Limited in Mileage
If you drive a lot, check the mileage restrictions in your lease before signing. Many leasing companies charge a fee if you go over that number, so you could end up paying more than you planned if you have a long regular commute.
Con: Condition Requirements
Many lease agreements require you to pay for excess wear and tear. When you return the vehicle at lease-end, the dealer could charge you to fix anything considered excessive by the lease agreement. You must read the fine print on condition carefully, since some wear and tear is to be expected.
How Buying a Used Car Impacts the Equation
A used car has a lower market value than a brand new one, so your initial acquisition costs could be lower than when purchasing a new one. However, you may still have the features and the benefits of a newer model.This makes buying more attractive if you are considering buying versus leasing.Recommended: 12 Questions to Ask When Buying a Used Car
Deciding What's Best for You
Given that there are benefits and drawbacks to both leasing and buying a car, which is better? So much depends on your individual situation, so only you can answer that. Ask yourself these questions as you consider your answer.
How much can I afford to pay each month?
Do I want an asset I can trade in or sell later?
Is it important to me to have a newer vehicle?
Is paying off an auto loan fast necessary?
How long do I want to keep my car?
What kind of rates would my credit qualify me for?
The Takeaway
When it comes to leasing vs. buying a car, the more thought and research you put into the process, the better the decision you’ll make.Ready to refinance your car loan? Lantern by SoFi can help. Fill out one simple form to get offers from multiple lenders in our network.
Frequently Asked Questions
Is leasing a car really a better deal than buying one?
Is leasing a car a total waste of money?
What are the disadvantages of leasing a car?
Photo credit: iStock/PatriciaEnciso
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
