The material presented here is for educational purposes only and is not intended to be used as financial, investment, or legal advice.
How Should You Pay for Your Car: Lease vs. Buy?
Getting a lease vs. buying a car — which is the best option? Getting a car is a major life expense. It’s smart to examine the pros and cons of leasing and buying so that you make a well-educated decision.
Other than buying a house or taking on a college loan, a car payment is one of the biggest life expenses you will incur. That’s why it’s important to understand the differences between leasing and buying before you shop for a new ride.
What’s a Car Lease?
Instead of paying the full purchase price of a vehicle and owning it after the loan is paid off, a lease is essentially renting a car for a period of typically 24 to 48 months, depending on the lease term you negotiate with the dealer. Unlike purchasing a car, you would return the vehicle to the dealership after your lease term is over.
Approximately 1 in 4 cars are leased rather than purchased.1
Lease vs. Buy a Car
To make it easier to decide which approach is best for you, we will discuss the pros and cons of leasing vs buying a car.
Pros of leasing:
- Lower monthly payment: Since you are renting the car, you’re typically only paying the depreciation amount rather than the full purchase price, which means a lower monthly payment.
- More car for the money: Some people prefer to lease vs. buy because it allows more freedom to choose a higher-end car with more bells and whistles than they could afford otherwise.
- Get a new car every few years: Most lease terms range from two to four years, which means you can move into another new car with the latest technology when the lease ends.
- Save on maintenance costs: A leased car will most likely have warranty coverage, so there’s a reduced chance of getting stuck paying for major repairs.
$460 = The average monthly lease payment in late 2020.2
Cons of leasing:
- The car is not yours: At the end of the lease, you must return the car and then either negotiate its purchase or lease or buy another car.
- No equity in the car: Since you’re not buying the car, each payment you make is going toward the cost of depreciation. That means you’re not building equity in the car that you could potentially recoup when you sell it.
- Money up front: With a lease, you may be required to put a sizeable chunk of money down at signing. A helpful tip is to open a savings account to set aside money for your lease down payment if you go this route.
- You may have to buy gap insurance: Many dealerships require gap insurance on leased cars. Gap insurance helps pay the difference between the depreciated value of the car and what you owe for the remainder of the lease should the car get totaled or stolen.
- You might get hit with fees: At the end of the lease, you may have to pay a vehicle turn-in fee if you don’t lease or buy another car from the same dealer. You could also get charged for any damages to the car like scratches to the paint or stains on the interior.
- That pesky mileage allowance: Car leases generally come with a mileage allowance. If you don’t stay under the limit, you’ll get charged. If you have a long commute or tend to take a lot of long road trips, a lease may not be the best option for you.
On the flip side, you could buy a new car rather than lease. Now, let’s go over some of the positives and negatives of buying.
$40,857 = The average cost of a new car, according to 2021 Kelley Blue Book data.3
Pros of buying:
- The car is yours: Once your loan term ends, you will own the car.
- No mileage limits: Owning a car means not constantly monitoring your mileage in fear you may go over your lease allotment. If you want to drive to Timbuktu and back, there will be nothing standing in your way.
- Sell it or trade it in any time: Since the car is yours, you can trade it in to a dealer or sell it privately when you’re ready for something new.
- Use it as a down payment on a new car: If you have equity in your car, you can use it as a trade-in to help lower the cost of a new car.
- You can customize or modify the car: Not that you would ever want to paint your ride neon green, but the point is you can if you own it. Owning gives you much more freedom to put your own stamp on your vehicle.
- No “wear-and-tear” fees: Owning your car means the dealer can’t ding you for any damages to the car.
$576 = The average monthly payment on a purchased vehicle in late 2020, according to Experian.2
Cons of buying:
- More expensive car payments: Since you’re paying the total price for the car, you’ll likely pay more per month. This could mean having to settle for a less expensive car with fewer upgrades.
- You’re in this for a while: Unlike with a lease, you can’t just change your mind and get a new car every few years. At least, not without paying off your auto loan first.
- Higher car repair/maintenance costs: Have you ever heard of Murphy’s Law — i.e., whatever can go wrong will go wrong? Higher ticket repairs seem to pop up right after a car’s warranty has expired, so be prepared.
Here’s the Gist
There are positives and negatives to both leasing and buying. To figure out what works best for your situation, consider what you can afford to spend each month, your long-term plans and your driving habits. As the old saying goes, knowledge is power. If you understand your options, you will be better prepared to make a decision that’s right for you — and your budget.