Should You Buy or Lease a Car? Here Are the Pros and Cons
While it all comes down to what works best for you, leasing a car usually works better for occasional drivers—and comes with lower payments to boot!
If you’re in the market for a new vehicle, you’re probably also faced with the decision as to whether you should buy a car outright or whether you should lease one. This isn’t a decision you should rush: Purchasing a car is a huge financial decision!
That’s why we’re here. We reached out to several automotive experts to learn the pros and cons of buying a car versus leasing one. While the final decision is up to you, their insights should help you know which option works best!
How is leasing different from buying?
The difference between buying a car and leasing one is like the difference between buying a house and renting one.
When you buy a car—unless you pay for the whole thing up front—you’re taking out a loan that you then pay off over a set term. Once the loan is paid off, you own the car free and clear.
When you lease a car, on the other hand, you are essentially renting it, making monthly payments for a set term, usually two to three years. At the end of the lease, you will be given the option to turn the car in or purchase it (more on that later).
Leases come with mileage restrictions and other conditions. If you exceed the yearly or overall mileage limit, for instance. you’ll pay extra. Plus, lessees are oftentimes responsible for extra fees and charges on “wear and tear” on the vehicle.
Whether you buy or lease a car, your credit score is going to be a factor. The better your score, the more favorable your terms.
Leases usually mean lower payments.
All other things being equal, leasing a car is going to be less expensive than buying one. According to James Houston, the Senior Director of Automotive Finance Practice at J.D. Power, “Retail financing payments are higher, and usually require more upfront costs like down payment or trade equity.”
In addition, leasing might mean qualifying for a better vehicle than you would be able to purchase. Automotive expert Richard Reina of CARiD.com cited the fact that “Lower monthly payments [for leases] may allow consumers access to higher value vehicles or more vehicle content.”
A lease could cost more on the back end.
However, Reina also pointed out that leases carry the potential for additional charges once the lease has ended, saying that “Lessees may be subject to lease end charges for excess wear and tear, excess mileage or termination fees when their lease term is complete.”
And if you decide to purchase that vehicle once your lease is ended, you might end up finding that you’ve been taken for a ride.
“To add insult to injury, should the driver wish to purchase the vehicle at the end of the lease, they’ll find it would have been more cost effective to have financed the purchase from the beginning rather than to have leased.” warned driving expert Alex Lauderdale of EducatedDriver.org.”
Finally, Reina added that prospective lessees should consider the size of their monthly payment against the total cost of the lease:
“When shopping around for leasing options, keep your long-term finance goals and credit score in mind and take interest rates into account. While a lower monthly payment on a leased Lexus might seem attractive, you could end up paying more in the long run than if you choose a lower rate.”
Leasing has gotten more affordable.
On the bright side, all those additional costs associated with leasing a car aren’t generally what they used to be. “Many of the previous stereotypes about auto leasing are no longer true, said Rob Drury, Executive Director of the Association of Christian Financial Advisors.
“Long gone are the days of lease-end balloon payments or unreasonable damage charges. A lessee can expect to turn in a reasonably maintained vehicle within the lease mileage limits without any charges.”
Luckily, if you’re thinking about leasing, a not-so-hot credit score is no longer the obstacle it used to be.
“It was once difficult to lease a vehicle without reasonably good credit standing,” said Drury. “Today, lease eligibility is extended to individuals with FICO scores below 600.”
Leases come with mileage restrictions.
Mileage limits are one of the biggest downsides to leasing a car. Or rather, it could be a downside, if you’re planning on driving your vehicle a lot. If you’re somebody who doesn’t use your car all the time or use it to drive long distances, a lease could be a better fit.
“Leasing is, or should be, a relatively straightforward transaction,” said Lauderdale. “If you don’t drive often—you work from home or only put a few thousand miles on your vehicle per year—a leasing option can definitely make sense.
“There are, however, potential land mines in the leasing option,” he added, “like penalties for additional miles driven over the lease agreement (e.g. driving 80,000 on a five-year/60,000-mile lease).”
Before making the decision to lease or drive, you should take a good long look at your driving habits and do the math. If you plan on driving a lot, then buying a vehicle is probably your best option.
Buying a car means owning a car.
Another decision you need to make before buying or leasing is whether or not you’ll be happy with not owning your vehicle outright.
“Overall, the lease versus buy decision comes down to finances,” said Reina. “With leasing, you’ll always have a monthly payment and you build up no equity. So, at the end of your lease, you have two options: Purchase the lease car or start a new lease with a new vehicle.
“On the other hand, when you choose to buy, the car is yours once it’s paid off. 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.”
The ins and outs of car ownership might not be something you’ve thought a lot about, but you should! Houston provided a clear picture of the benefits of buying (and owning) a car versus leasing one:
- “Retail customers have no restriction on the use of vehicle, mileage or up-keep maintenance of the vehicle.
- “Retail customers have equity at end of the loan term and can make next vehicle purchase based on their timing.
- “Retail customers have an asset (and hold title in most states) that can be refinanced or sold at per customers need/want.
- “Retail customers have no payment obligations once the loan obligation has been fulfilled (lease customers must replace vehicle at end of term).
- “Retail customers are free to trade or sell their vehicle at any time.”
On the other hand, leasing a car means that you’ll always be driving a relatively new vehicle. “Lease terms are much lower than retail terms (36 months vs 60 months) so lessees have access to newer units sooner,” said Reina, adding that, “Technology changes tend to be rapid.”
Lower payments are great, and so is always driving a new(ish) car; but being able to use your car without restrictions—including selling the car if you want —is great, too! You have to decide which option works better for you.
Buying a car comes with added risks.
Here’s something that lessees don’t usually have to deal with: When you’re buying a car, you have to make sure that the dealer is being upfront with you. This is true even for new vehicles, but it’s especially true for used cars.
Lauderdale laid out three risks involved with car-buying, and the steps you can take to avoid them—many of which boil down to simply being a smart, cautious buyer and doing all your research pre-sale:
- “Used Car History: A viable dealership or private seller has nothing to hide, and will often provide a Carfax history report when they know a buyer is serious about a purchase. If they don’t provide a report, I strongly suggest a buyer walk away. That said, if the car is a ‘must have’, the soon-to-be owner should take the time and money to do a little research of their own. I strongly recommend CarFax.com when car history summaries are needed. No one wants a lemon or previously totaled vehicle.
- “Car Value: One way a dealer or private seller can take advantage of a potential buyer is to overprice the vehicle. There is way too much information at our fingertips to let this be a reason for not getting a good deal. Sites like Autotrader.com will allow one to input the prospective car’s criteria, compare the dealer’s or private seller’s price to similar vehicles in the area, and even highlight whether it is a “good” or “great” deal.
- Add-On Features: Dealerships will often try to push bolt-on items at the end of what you thought to be a great deal on your new or used car purchase. These add-on products come in the form of extended warranties, car service agreements, undercoats, fabric protectant, gap insurance, etc. Listen, we live in a time where one can easily get 200,000 miles out of a car if it is properly maintained. The cost vs. use of these extra items is often one-sided, for the good of the dealer. Additionally, if the buyer chooses to use the dealership’s captive lender, the dealer ends up making money on the up sale, and the associated interest.”
The risks involved with buying a car aren’t that different from buying a home. And those risks probably shouldn’t be the thing that dissuades you from buying. But if you are going to buy, you should be prepared to put in the legwork necessary to do it right.
Which works best for you?
In the end, the decision to buy a car versus leasing one is going to come down to what works best for you. If it helps, think less in terms of pros and cons than in terms of what you need as a driver.
“Retail financing (owning) or leasing a vehicle is an individual decision,” said Reina. “Each option has pros and cons, but those pros and cons need to be considered before entering into a transaction. An informed and educated consumer should be able to decide based on his or her lifestyle and transportation needs.”
Ask yourself, what are your driving priorities? Let the answer guide you.
“If I want a new car every two to three years, drive limited miles, and maintain my vehicle to contractual standards, then I might be a good lease candidate,” said Houston. “If I keep my car for many years, don’t want to be restricted on the miles I drive, and don’t want to be concerned about how I maintain my vehicle, I might be more inclined to traditionally finance my vehicle.”
No matter what decision you make, first make sure that you’re as informed as possible and that you’ve explored every possible option.
“Every transaction is different, and there’s no substitute for doing one’s homework,” said Lauderdale. “Car buyers/leasers need to explore all options, getting quotes from their bank, the dealer, and any other available options. Then, do the math to find the best total cost for personal transportation.”
Rob Drury is the Executive Director of the Association of Christian Financial Advisors, a non-profit coalition of over 3,000 advisors of various financial disciplines; financial planners, CPAs, attorneys, estate planners, mortgage brokers, and others dedicated to the financial welfare of the American public, particularly among the Christian community. Headquartered in San Antonio, TX, the ACFA offers broad financial expertise and advisory services at no cost.
As Senior Director, Automotive Finance Practice at J.D. Power (@JDPower), James Houston leads the team that brings Voice of the Customer to the auto finance industry. Automotive finance brands rely on the data-driven insights that he and his practice deliver to understand, plan and act on current market and future trends. He has a wealth of industry experience in the auto finance space, with previous positions at TD Auto Finance, Chrysler Financial, Chase Automotive Finance, and Bank of America Auto Group. Mr. Houston is a graduate of Central Michigan University.
During his nearly 20-year career, Alex Lauderdale has served in multiple Transportation Administration, Analytic, and Management positions spanning multiple companies, including 2 in the Fortune 500. At EducatedDriver.org (@educated_driver), he uses his experience and continued research to educate and broadcast information related to the current status and future of driving, driving technologies, technology TCD (total cost to driver), driver safety, and gaps in between.
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