The choice between leasing a car vs. buying is a tough one. When it comes to making a big purchase like a car, there are a lot of factors to consider. Leasing or buying? New or used? Both options have pros and cons, and it can be tough to decide what’s best for you. It’s vital to understand the major differences before deciding which route to choose. In order to help you make the best decision, we’ve put together a list of pros and cons of leasing a car vs. buying.
What is Leasing a Car?
Car leasing is sometimes compared to apartment leasing, and the two have certain similarities. You’re essentially renting a car from the dealership for a set period, usually two to four years, when you lease a car. You make monthly payments during the term of the lease, and at the end of the lease, you have the option to buy the car or turn it back into the dealership.
Car leasing agreements include a restriction on how many miles may be traveled each year, usually between 12,000 and 15,000 miles. You may owe roughly 25 cents every additional mile if you go beyond the agreed-upon mileage. Thus, when you lease a car, you’re only paying for the portion of the vehicle’s life that you use.
How To Lease a Car
The process of leasing a car is fairly simple. First, you’ll need to find the right vehicle and dealership. Once you’ve found the perfect match, it’s time to negotiate the lease terms. Lease payments are determined by a variety of factors, including:
- Sale Price: This is the starting point for negotiation and is usually the Manufacturer’s Suggested Retail Price (MSRP)
- Capitalized Cost: The “cap cost” is the agreed-upon sale price minus any rebates or down payment
- Rental Charge: This is the amount charged for using the vehicle over the life of the lease. This fee is determined by multiplying the capitalized cost by the money factor
- Money Factor: A number that’s used to calculate your interest rate. It’s similar to an APR, but it’s expressed as a decimal instead of a percentage
- Length of the Lease: The longer the lease, the higher the monthly payments
- Annual Mileage: The more miles you drive, the higher your monthly payments
- Expected Mileage: If you expect to drive more than the standard mileage allowance, you can negotiate a higher mileage limit for higher monthly payments
- Residual Value: This is the projected value of the vehicle at the end of the lease term
- Fees and Taxes: These include registration, title, and other taxes that may be applicable
Once you’ve negotiated the lease terms, it’s time to sign on the dotted line. Be sure to read and understand the entire lease agreement before doing so. After both parties have agreed upon the terms, you’ll sign the lease agreement and drive away in your new car.
It’s important to remember that you’re not actually buying a car when you lease a car. You’re only paying for the use of the vehicle during the lease term. At the end of the lease, you have the option to buy the car or turn it back into the dealership.
The Pros of Leasing a Car
☑Less to No Down Payment Required
One of the biggest advantages of leasing a car is that you may not have to make a down payment. In some cases, all you need is your first month’s lease payment and a security deposit (usually equal to one month’s lease payment).
☑Lower Monthly Payments
Because you’re only paying for the portion of the vehicle’s life that you use, your monthly payments will be lower than if you were to purchase the car outright.
☑Switch New Car Every Year or Two
Leasing is a great option if you enjoy driving a new car every few years. At the end of your lease term, you can simply turn in the keys and walk away without worrying about what to do with an old car.
Leasing may also allow you to drive a higher-end vehicle than you could afford to purchase outright. Most individuals prefer to lease cars since they may drive higher-end vehicles for a lower monthly price. A 2 to 3 car lease also enables drivers to update existing cars easily and regularly.
Of course, not everybody leases to have a luxury vehicle. Clients often get a lower down payment, warranty, and free regular maintenance when leasing a car. These are significant advantages that make leasing more attractive than buying for many people.
☑No Resale Worries
When the lease is up, drivers can simply turn in the keys and walk away without worrying about what to do with an old car.
☑Protection on Depreciation
You don’t have to worry about what will happen to the value of your car after you drive it off the lot. When you lease, any depreciation that occurs during the term of your lease is the lessor’s problem, not yours.
☑Maximize Tax Deduction
If you are using your car for work, the lease would usually provide you with greater tax benefits than the loan. Since the IRS enables you to deduct both financing and depreciation charges as part of every monthly bill, well, this is possible. If you lease a luxury vehicle, the amount you could deduct has its limitations.
☑Transfer Lease to a New Driver
If you need to get out of your lease for any reason, you may be able to transfer it to another driver. It is a great way to avoid early termination fees and other penalties associated with breaking your lease agreement.
☒Lack of Ownership
The biggest downside to leasing a car is that you never actually own the vehicle. Once your lease is up, you’ll have to turn in the keys and start the process again if you want to continue driving the same car.
Most leases come with mileage restrictions, usually between 12,000 and 15,000 miles per year. If you go over this limit, you’ll have to pay a fee for every mile driven.
☒Higher Insurance Costs
Leasing companies require drivers to carry comprehensive and collision insurance on leased vehicles. This type of coverage can be expensive, especially if you’re driving an expensive car.
☒Wear and Tear Charges
Leasing companies will charge you for any wear and tear that occurs during your lease term. It includes things like minor dents, scratches, and tire damage.
☒More Complicated than Buying
Leases are more complicated than car loans, and it can be difficult to understand all the terms and conditions. Be sure to read your lease agreement carefully before signing on the dotted line.
☒Maximize Insurance Premiums
If you are looking to get the most out of your insurance policy, it is best to purchase a car outright. This way, you can tailor your coverage to fit your needs without worrying about what the leasing company requires.
Gap insurance, which covers the discrepancy between the car’s present value and the outstanding debt, is another option. This form of insurance is included in the price of many leased cars.
☒Costs for Canceling a Lease Early
If you need to cancel your lease for any reason, you’ll likely have to pay a hefty early termination fee. You may also be responsible for any unpaid monthly payments and any damage to the car.
There are pros and cons to leasing a car vs. buying. It’s essential to weigh all your options before making a decision.
Who Is Leasing Best For?
First and foremost, leasing is a great option for people who don’t have the full amount of money needed to buy a car outright. If you can’t afford to or simply don’t want to put down a large down payment, leasing may be the best option.
Leasing is also a great option if you like to have the newest model of the car every few years. Since leases are only for a few years, you can always trade-in your old car for a new one when your lease is up.
However, keep in mind the mileage limitations and possible additional wear-and-tear costs with leasing. Leasing may not be the best option if you plan on taking extended road trips in the future.
The Pros of Buying a Car
Suppose you’re unsure whether to buy or lease. It’s essential to consider your needs and what you can afford. If you want the freedom to customize your car and don’t mind paying more for repairs and maintenance, buying might be the best option.
So to clear any doubts that buying a car is a great option for you, let’s weigh down the pros and cons.
✅You Own the Car
One of the biggest advantages of buying a car is owning it outright. It means you can do what you want with it without worrying about mileage restrictions or wear and tear charges. You can also sell your car at any time without paying the penalty.
✅Lower Insurance Costs
If you own your car, you may get by with less comprehensive collision coverage than what’s required for leased vehicles. It can save you money on your monthly insurance premiums.
✅No Early Termination Fees
If you decide you no longer want your car, you can and collision coverage. It can save you a significant amount of money on your monthly insurance premiums.
The Cons of Buying a Car
❎More Expensive Upfront
One of the biggest disadvantages of buying a car is that it can be more expensive upfront than leasing. You’ll need to have enough cash for a down payment and pay any taxes and fees associated with the purchase.
❎Higher Car Loan Monthly Payments
If you finance your car purchase, you’ll have to make monthly loan payments. These payments can be higher than you would pay for a lease, depending on the car price and the terms of your loan.
❎Post-warranty Maintenance Cost
Once your car’s warranty expires, you’ll be responsible for all repairs and maintenance. It can be expensive, especially if you have an older vehicle.
❎Depreciates Over Time
All cars depreciate in value over time. If you decide to sell your car, you’ll likely get less money for it than what you paid.
❎Huge Down Payment
Downpayment is among the most important factor when considering buying a car. The average down payment is 20% of the total cost but can range from 0% to 50%. That’s a big chunk of change that could be used for investing, vacations, or emergency funds.
Who Is Buying Best For?
Buying a car is best for people who want to own their vehicle outright, don’t mind paying for repairs and maintenance, and don’t plan on taking extended road trips. If you can afford the upfront cost and higher monthly loan payments, buying might be the right choice.
Frequently Asked Questions for Leasing a Car Vs. Buying
Q: Can I lease a car if I have bad credit?
You may be able to lease a car with bad credit, but it will likely be more difficult and expensive than it would be if you had good credit. The first step is to check your credit score and report to see where you stand. If your score is below 600, it will be difficult to lease a car, but not impossible. You may need to put down a larger security deposit or make higher monthly payments.
There are a few things you can do to improve your odds of being approved for a lease with bad credit:
- Try leasing from a smaller independent dealership rather than a large chain
- Find a cosigner with good credit
- Offer to make a larger security deposit
- Agree to make higher monthly payments
Q: What is the difference between a lease and a loan?
The biggest difference between a lease and a loan? With a lease, you’re only paying for the use of the car during the lease term. With a loan, you’re paying for the entire cost of the car, plus interest. When you lease something, you are essentially renting it, while when you take out a loan, you are borrowing money to buy the object.
Leasing usually has lower monthly payments than loans, but you may not be able to own the object at the end of the lease. You will own the object with a loan once you’ve paid off the entire amount, even if it takes years or decades. It means that you will have to turn in the car at the end of a lease, while at the end of a loan, you will own the car outright.
Q: Should I buy or lease my next car?
It depends on several factors, including how long you plan to keep the car, how often you drive it, and your budget. Leasing a car can be more expensive in the long run than buying one, but it can also be a more economical option if you don’t plan to keep the car for very long or if you drive it frequently. If you’re looking for flexibility and don’t want to be stuck with a car when you’re done with it, leasing may be better. However, if you’re looking for something that will last for a long time and that you can eventually sell or trade-in, buying may be the better option.
Q: Is it worth purchasing the car at the end of my lease?
In general, it is not advisable to purchase a car at the end of a lease. The reason for this is that the car’s residual value (the amount that you would be responsible for if you chose to purchase the car at the end of the lease) is generally higher than what the car is actually worth on the open market. You would be paying more for the car than it is worth, which is not a good financial decision.
There are some exceptions to this rule, however. If you believe that the car’s value will increase significantly over time (for example, if it is a classic car or a very new model), then purchasing it at the end of your lease may make sense. You should always consult with a financial advisor to see if purchasing the car at the end of your lease is a good idea in your specific situation.
Q: Is there anything I should know before leasing a car?
Before you sign a lease agreement, it’s important to be aware of the potential financial risks. Leasing a car generally requires that you make a down payment and then make monthly payments for the lease term. If you terminate your lease early, you may be required to pay the penalty. Additionally, you will need to either return the car or purchase it outright at the end of the lease term.
It’s also important to be aware of the mileage limits specified in your lease agreement. Going over this limit can result in significant additional charges. Furthermore, you will be responsible for maintaining the car and returning it in good condition at the end of the lease term. Any damage beyond normal wear and tear may result in additional charges.
Q: Is it possible to improve your credit by leasing a car?
It is certainly possible to improve your credit by leasing a car, though there are a few caveats to keep in mind:
- Your credit will only improve if you make all of your payments on time and fully. If you miss a payment or make a late payment, your credit score will likely suffer.
- The terms of your lease agreement may impact your credit score. Some leases require that you maintain insurance coverage throughout the lease, which can be costly if you have poor credit.
- It’s important to remember that leasing a car is not the same as owning a car outright.
If you default on your lease payments, the car may be repossessed, which could have a negative impact on your credit score.
Q: Before returning a leased car, what should you do?
Before returning a leased car, you should thoroughly clean the interior and exterior of the car. You should also repair any damage that may have occurred during your lease. If you have any questions about how to return your leased car, you should contact your leasing company.
Q: Which month is ideal for leasing a car?
The best time to lease a car is usually when manufacturers offer special deals or incentives. For example, many automakers offer zero-down leases or other low-mileage options around the end of the calendar year to move out old inventory. Some carmakers also offer special lease programs in the spring and summer to coincide with the peak driving season. If you’re flexible on what type of car you want to lease, shopping around for seasonal or promotional deals could help you get a great deal. You can also check some websites specializing in tracking lease deals to see what’s currently available.
Q: How do I know if leasing a car is right for me?
The best way to determine whether leasing a car is right for you is to consult with a financial advisor. They can help you evaluate your specific situation and recommend based on your needs and goals. Additionally, it’s important to do your research to learn about the pros and cons of leasing vs. buying a car. Once you have all the information, you can decide what’s right for you.
Q: Is it worth buying a car through a loan or lease?
The answer to this question depends on your specific financial situation. If you have the cash on hand to purchase a car outright, it may be worth doing so. However, if you’re tight on cash or your credit isn’t great, leasing a car may be a better option. Ultimately, it’s essential to consult with a financial advisor to get tailored advice for your situation.
There are a lot of factors to consider when deciding whether to lease or buy a car. It’s essential to do your research and consult with a financial advisor to make the best decision for your needs. Leasing can be a great option if you’re looking for flexibility or want to avoid a long-term commitment. However, buying may be the better choice if you’re looking to build equity or have the cash on hand to make a purchase. Whatever you decide, be sure to consider all your options and make a decision that’s right for you.