Buying a car presents you with a lot of important questions to ask. What make, model and trim level do you want? What about the color? Is it fuel efficient and safety rated for the family? How will it look sitting all shiny in your driveway?
When all those decisions are made, there’s still one consideration left to make that takes precedence over them all: How will you finance your new ride?
Barring the lucky few who can afford to pay cash in full, the rest of us are presented with the choice of either buying or leasing a car. Both have their upsides and their downsides, but neither one is the absolute perfect option for all consumers.
The difference between buying and leasing a car
Buying a car traditionally involves borrowing money in the form of an auto loan, where you’ll make payments with interest over a certain period of time. When you’ve paid off the loan, you get to call the car your own.
Leasing a car is basically renting a car. You’ll still make monthly payments, but it’s not a loan, so the money isn’t technically borrowed, but paid for month-to-month usage. You can keep driving the car for as long as the lease is active.
But those are only the basics. If you’re eyeing up a new car (or used, or certified pre-owned), you’ll want to make sure you won’t regret the payment plan you choose. Before signing off on a loan when you should be leasing, or leasing when you should be buying, take a look at some of the pros and cons.
Buying a car: The pros
You get to own your car. It’s as simple as that. Once you fully pay off your auto loan, you receive your title, the car is yours, and you’re free to sell it, trade it or keep driving it. Compare that to leasing, where you need to turn in the car when the contract is up. It’s no different from paying off a mortgage and calling your house yours, versus years of rent payments on an apartment lease.
Buying is cheaper (in the long run). Pay off the car early and you’ll save on interest payments. (I had a 60-month loan on my car, but paid it off in about 50 months; I saved money by paying ahead and preventing the APR from compounding.) The longer you keep the car, the more value you get from it. With a lease, you need to keep paying each time you trade in for a new car.
Your car is yours to do what you wish. An auto loan imposes no excess mileage penalties or restrictions, so you can drive from New York to California and back, or customize the car with some godawful aftermarket gullwing spoiler if you want. (You’re not returning the car back to the dealer like you would a leased car.) This is quite the freedom to have, considering that you technically don’t own the car when you’re still paying it off.
Buying a car: The cons
Higher monthly and down payments. Buying a car often requires a large down payment -- usually 10% to 20% -- to be approved for the loan. If your credit score is poor, you may be asked to put more money down up front or be denied. Because of interest on the loan (which also depends on your FICO score), your monthly payments will be higher than those of an auto lease.
Dealing with depreciation. It’s said that a new car depreciates at least 11% the second you drive it off the lot. And it’ll keep depreciating and losing resale value the longer you keep it. This can be problematic if your car is worth less than what you owe on your loan, leading to negative equity in your car. A leased car’s value, on the other hand, is of no concern to you, dear motorist; you’ll just trade it in after a few years.
Maintenance costs can be a burden. Once the warranty on your car expires, you’re responsible for paying for all repairs, no matter how big or small. At some point, the cost to keep fixing the car may outweigh the value of the vehicle.
Leasing a car: The pros
Lower monthly payments. Lease payments are usually lower than those of auto loans since there’s no interest attached to the deal. You can still put some money down like you would on a loan, and for a lease, the absence of an APR means you can afford to drive a more expensive car you might not be able to afford to buy.
Driving a new car every couple of years. Buying a car can mean seeing it go from shiny and new to old and worn down, with a million miles on the odometer. Leasing a car means trading off for a new model every few years, no strings attached, so you’ll always have that new car feel and smell, plus the most current safety features and amenities. Plus, it’s convenient; you don’t have the responsibility of having to eventually sell the car and deal with transferring titles.
Pricing is set and tax breaks are possible. The future resale value of the car is already predicted and incorporated into your lease payments, so you won’t ever risk losing money like you would on a loan worth more than the car you’re paying off. If you drive a leased car for business purposes, you may also qualify for tax breaks (Why do you think doctors and lawyers always lease their Benzes and Audis?).
Leasing a car: The cons
Leasing is more expensive (in the long run). Monthly lease payments may be initially cheaper than loan payments, but if you always lease, you’ll always be making those payments with no end in sight. Purchasing a car is like buying a house: you’ll have some value/equity in it once you’ve paid off the vehicle that can be used as a down payment towards your next car. With leasing, you’re stuck in that payment cycle in perpetuity.
Several rules and restrictions apply on a lease. You’re limited in the amount of miles you can drive each year. After you pass 10,000 or 12,000 (on average), penalty fees apply -- usually 15 to 25 cents per mile. Contracts are hard to escape; early termination fees may cost you thousands of dollars if you try to break your lease.With a loan, at least you can refinance. In addition, you may be charged penalties if you return the car at the end of the lease in less than pristine condition, so maintenance costs can add up. It is a rental, after all.
You don’t own the car. And how does it always go? The expensive car we’ve leased is the one we want to end up keeping, but we need to turn in because it’s too much car for us to buy. (You could opt to purchase it once your lease is up, but it could be prohibitively expensive.) Even generally speaking, there is nothing about a lease that indicates or resembles ownership. With the structure of down payments, creditworthiness and lenders, an auto loan makes it more likely you’ll get a car you can better afford -- and you can call it yours in the end.
Should you lease, or should you buy a car?
You should base your decision to buy or lease a car on your own lifestyle, driving habits and finances.
Determine how much you drive each month and year to avoid excess mileage fees attached to leases. Buying may be the better option if you’re the behind the wheel a lot; leasing, more feasible if your commute is short.
If you prefer to keep one vehicle for long periods of time, or if you care about equity and resale value, buy. If you like the change of a new vehicle every so often, lease.
For those interested in building credit, buy a car; likewise, go for an auto loan if you want payments only for the short term. Lease when the affordability of lower monthly payments outweighs the burden of making car payments for what seems like forever.
If affording a larger down payment is a problem, but you want to buy, lease for now until you can save up for a future car purchase. But if interest rates are low (i.e. your credit score qualifies you for a low APR, or rates are offered as part of a dealer incentive), it might be worth the investment to buy a car.
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.