Leasing vs. Buying a Car: What You Need to Know Before You Choose

Sep 9, 2022

by RateGenius

When you need a new car, the decision to lease or buy can be a tough one.

Are you in the market for a new vehicle? If so, you most likely have a car in mind and have begun comparing prices at all of the dealerships in your area. If so, you’ve likely noticed that two different monthly payment options are listed for the vehicle: the purchase price and the lease price. The lease price is, more than likely, the lowest of the two, making it the most intriguing.

But what if I told you that the lowest price doesn’t always reflect the best option? Depending on your finances and must-haves in a vehicle, it might not be. That said, when it comes to leasing versus buying a car, there are many different things to consider.

Leasing a Car

Leasing a car gives you the right to use it for an agreed-upon amount of time and for a set number of miles. You can think about it as being similar to renting a vehicle, only longer-term, usually ranging from two to three years.

Typically, leasing a car doesn’t lead to vehicle ownership, unless the dealer offers you a car lease buyout, and you accept it. So what attracts people to leasing? Well, most lessees like the option of switching to a new car every few years and enjoy not having to be the one responsible for maintenance costs.

The pros and cons of leasing a car

Let’s examine the pros:

You will have lower monthly payments: Leasing a car usually comes with lower monthly lease payments when compared to financing rates for the same vehicle.
You can consistently drive newer cars: With leasing, you must return your car to the dealer at the end of your lease term. Once you do, you can lease a newer vehicle and continue the cycle.
Warranty protections are in place for the entire lease term: Most of the time, the vehicle that you lease will be new at the beginning of your lease term and still under warranty from the manufacturer. Plus, many dealerships offer a maintenance plan as part of the leasing package, since they are invested in keeping the car from depreciating even more than the lessee.

Now, let’s take a look at the cons:

You must return the car at the end of the lease term: When your leasing period is up, you must return your vehicle to the dealer unless your lease contract allows you to negotiate the purchase of the car. If a dealer doesn’t offer you a buyout, you have to give up your vehicle, no matter how much you like it.
You might pay higher insurance premiums: When leasing a car, you might be required to up your car insurance coverage. Most lease agreements require you to carry comprehensive and collision coverage, but others will also require higher bodily injury liability limits and a set amount of property liability insurance. Plus, even if you aren’t required to have it, you might also want to consider purchasing GAP insurance.
You’ll face stricter credit requirements for approval: Although credit requirements are different from dealer to dealer, your credit score and history will need to convince the lessor that you are not a risk to lease to. That said, those with bad credit can lease vehicles, but they will likely have more limited options when it comes to both vehicles and lease terms. As with most lending situations, the better your score, the better your rate will be.
You have to mind your mileage: Depending on your lease agreement, you might only be able to drive 12,000 to 15,000 each year with your leased car. If you love road trips, this should be a big factor in your decision, since extra mileage charges can rack up quickly.
You aren’t gaining equity: When you lease a car, none of what you pay goes toward the purchase price of it. Because of this, you aren’t building equity in your vehicle, and can’t use it for leverage or sell it off when money gets tight.
Leasing carries a higher cost over time: If you exclusively lease your vehicles, you will always be paying a monthly bill, even if it adds up to enough to cover the purchase of a car. On the other hand, with buying, you are able to purchase a car in a matter of years and then keep it long after that, should it not become damaged.
You have to keep up with appearance requirements: Since leasing your car doesn’t mean you own it, you will need to keep up with its appearance and avoid making any alterations. This means that the majority of lease agreements will prevent you from customizing your car with things like aftermarket parts and bumper stickers.

Even though there are way more cons than pros, there are some people who a lease just makes more sense for.

When Leasing a Car Is Best

Although leasing has its downsides, it is a great option for certain drivers. Drivers that will reap the benefits of leasing the most include:

Those who like having the newest car

It’s 100% okay if you want to have a brand-new car every few years. That’s why leasing has become such a popular option, after all. If the main thing you’re looking to get out of your car is a cool ride, stick to the lower monthly payments that a lease can offer.

Those looking for lower monthly payments

When you buy a new car, even when you make a down payment, your monthly car payment could still be high. Leasing offers a more affordable way to drive, and, for the most part, you don’t have to come up with the money for a down payment or other fees a dealer might charge purchasers.

Those who don’t want to be responsible for maintenance

Since leasing gives you the ability to drive brand new cars, which are often still protected by factory and dealership warranty contracts, maintaining your vehicle often comes down to just bringing it into the dealer shop whenever something needs repair.

Although there will likely be components that aren’t covered under warranties, the dealership’s goal is to help you keep your leased vehicle in tip-top shape. This way, they can lessen the depreciation of the vehicle’s value and still make a profit when they eventually sell it.

Those who use their car for business

If you own a business, leasing a vehicle is usually more economical for your bottom line. Not only can you count on lower payments on a car that impresses your clients, but you can also take advantage of tax deductions available to those who lease.

Buying a Car

When you purchase a car, you are building equity in a valuable asset, even though vehicles start depreciating as soon as you drive them off the lot. As long as you are careful not to develop negative equity, you can sell your vehicle for a profit in times of financial need or even use it as a trade-in when purchasing a new vehicle.

One thing that buying a car comes with that a vehicle lease doesn’t is an auto loan. Unless you have enough cash to cover the entire purchase price of the vehicle, you’ll need to finance your vehicle.

The pros and cons of buying a car

Let’s take a look at the pros:

Buying is cheaper over time: Buying a car, especially if you plan to own it long-term, is often cheaper than leasing. Once you own a car, you can drive it for many years after it is paid off, barring a major accident.
You can build equity to leverage later: Although vehicles depreciate quickly, building equity in one gives you leverage for future lending needs. If paid off, you have a sellable asset when you need one.
There are no restrictions on appearance: When you buy a car, it is all yours! This means you can customize it however you would like, as long as it is legal in your state and doesn’t compromise your insurance coverage.
There are no mileage restrictions: When you buy a car, you don’t have to worry about pesky mileage limits. Instead, you make the rules about how far you can go.

Now, let’s consider the cons:

You’ll have higher monthly payments compared to if you leased Purchasing a vehicle typically comes with high monthly loan payments that are greater than monthly leasing fees. These payments are partly dependent on the interest rate on the loan you choose.
You’ll pay greater upfront costs Between a down payment, sales tax, and dealer fees, you will need to have more money upfront when buying a car than when leasing one.
You have to sell it or trade it in to get rid of it When you own your vehicle, you are responsible for getting rid of it once you are ready to move on to a new vehicle. Depending on how much it has depreciated, its value might not go very far toward your new car purchase.
You are responsible for all maintenance and repair costs after warranties expire: After all of the warranties are up on your car, you will need to cover all of the costs that were previously covered. So, you not only need to cough up the money for a down payment, but you should also plan to set aside money for regular maintenance.

Although the pros and cons are even, there are still many people who would benefit more from buying a car.

When Buying a Car Is Best

Buying a car has many upsides, but is it better than leasing? For these people, the answer is usually yes:

Those looking to build equity

Although cars can depreciate rather fast, they are still an asset that holds equity. If this is important to you, buying your car is the way to go. To ensure that you reap the benefits of having equity in your car, like its resale value, be sure to pay off your car loan as quickly as you comfortably can.

Those who like to customize their car

Buying a vehicle gives you the freedom to do anything (legally) that you want with it. Want to trick out your vehicle with aftermarket parts? No problem. Maybe you really love bumper stickers and want to plaster the entire back of your vehicle? Done!

Those looking for long-term affordability

Buying a car might seem like a substantial investment, especially upfront, but the cost over time is usually less than leasing. If you keep your car long-term and are able to pay it off before it depreciates, it is even more affordable.

If you choose to go down the buying route and are worried about the cost of monthly payments, remember that you always have the option to refinance your auto loan later and lock in better rates.

Those who rack up the miles

If you travel often or have a lengthy commute, you likely rack up miles faster than people who use their vehicle just to get around town. If you spend a lot of time driving, buying a car can help you avoid mileage overage charges.

Those who want to buy a used car

If you’re looking for the absolute cheapest price on your next vehicle, buying used could be the answer. You can buy used cars for under $10,000 on most lots and take out a loan with a shorter loan term.

Used cars often come with lower insurance costs, cheaper annual registration rates, and lower down payment requirements. Just make sure to do your research beforehand, as some used cars will come with a ton of maintenance costs, which could ultimately offset the low price.

What Option Should You Choose?

To decide which option is right for you, you’ll want to start by weighing both and not acting on impulse. After all, locking yourself into a contract, whether with a leasing company or a lender, can have a huge impact on your overall financial well-being if you choose incorrectly.

To make your decision easier, start by asking yourself these questions:

Do you need to upgrade your vehicle every couple of years?
Are you open to purchasing a vehicle and driving it for several years, even if it doesn’t have the newest technology?
Can you afford for your insurance premium to go up? If you can’t, will lower monthly payments on a lease offset the added cost?
Do you travel more than the typical yearly lease mileage limits?
Is building equity in a salable asset important to you?

Once you have the answers, it should be clear, based on your personal preferences and needs, which option is right for you.

About The Author

RateGenius

A better way to refinance your auto loan. RateGenius works with 150+ lenders nationwide to help you save money on your car payments. Since 1999, we've helped customers find the most competitive interest rate to refinance their loans on cars, trucks, and SUVs. www.rategenius.com