Pros and Cons of Leasing or Buying a Car

Should you lease a new car or buy it? Typically, the choice comes down to priorities. For some drivers, it's purely a matter of dollars and cents. Which is the less expensive option, right now?

For others, it’s about the benefits of ownership. Before choosing the road you go down, it’s important to understand the key distinctions between leasing a car and buying one.

Lease or Buy a Car: What's the Difference?

When you lease a vehicle, you pay to drive it for a certain length of time. That's usually 36 or 48 months. Restrictions apply to how many miles you can drive and modifications you may wish to make to it. Various fees will apply.

Once your lease period ends, you have the option to return the vehicle to the dealer or purchase it at a predetermined amount, as defined in the lease contract.

When you buy a car, you immediately take title to it. You own it outright if you pay for it with cash or after a loan is paid off, if you finance your purchase. You maintain control over all aspects of the vehicle and ultimately, can keep it, trade it in, sell it, or give it away.

Pros and Cons of Leasing

Lease payments are generally lower than the monthly loan payments for a new vehicle. They depend on these factors:

• Sale price: This is negotiated with the dealer, as with a vehicle purchase.
• Length of the lease: This is the number of months you agree to lease the car.
• Expected mileage: The lease sets a maximum number of miles you can drive the car each year. Most leases come with a 12,000-mile annual allotment. The monthly payment will increase slightly if you go for a higher yearly mileage. If you exceed the mileage limit in the contract, you'll owe the dealer cash for every extra mile at the end of the lease.
• Residual Value: This is the vehicle's value at the end of the lease, with its depreciation figured in. If you decide to purchase the vehicle once the lease expires, this is the amount you will pay.
• Rent charge: This fee is shown as a dollar figure rather than appercentage, but it is the equivalent of an interest charge.
• Taxes and fees: These are added to the lease and affect the monthly cost.

Some dealers or the manufacturers they represent require a down payment for a lease. The more you put down, the lower your lease payment will be.

Keep in mind that it may not make sense to put too much cash down on a vehicle that you'll ultimately be handing back to the dealer. If you're quite sure you're going to buy it when the lease expires, the down payment will reduce the cost of purchase.

Pros

Lower Monthly Costs

A lease can slightly ease the financial burden of monthly costs. It usually involves a smaller down payment compared to buying. Due to this, some people opt for a more luxurious car than they otherwise could afford.

A New Car Every Few Years

For many people, there’s nothing like the feeling of a brand new ride. When a lease is up, you can return it and get your next new car. By leasing, you'll also get the latest advances in car technology every few years.

Worry-Free Maintenance

Many new cars offer a warranty that lasts at least three years. So when you take out a three-year lease, most of the repairs may be covered. Leasing arrangements can potentially eliminate some significant, unforeseen expenses.

No Resale Worries

You simply return the car (unless you choose to buy it). The only thing you have to worry about is paying any end-of-lease fees, including those for abnormal wear or additional mileage on the vehicle.

Potential for Tax Deductions

If you use your car for business purposes, a lease may afford you more tax deductions than a loan. That’s because the Internal Revenue Service (IRS) allows you to deduct both the depreciation and the financing costs that are part of each monthly payment. If you’re leasing a luxury automobile, the amount you can write off may be limited.

Cons

No Ownership

The restrictions of a lease can impede how much and how far you wish to drive. Moreover, drivers who'd like to make modifications to their vehicles should understand that fees may apply. They may also have additional costs at the end of the lease due to the need to reverse any changes they make.

Lack of Control

You can't sell the car or trade it in to reduce the cost of your next vehicle. Plus, since you'll start a new lease when one expires, you'll always have monthly costs and ongoing lack of control over certain aspects of a vehicle.

Fees and Other Costs

Fees in your lease contract apply to excess mileage (typically 10,000 to 15,000 miles per year), modifications to the car, and excess wear and tear. There's also an early termination fee if you decide to end the contract early.

What's more, you pay an acquisition fee (also called a lease initiation fee). You may have to pay a fee to cover what the dealer pays to clean and sell the car once your contract ends. Finally, unless the lease includes gap insurance, you may also owe costs related to accidents you may have had that your insurance doesn't cover.

Ultimately, it's more expensive to lease cars for the long-term instead of buying one and using it for years.

Pros and Cons of Buying

When you buy a car, you can keep it for as long as you choose to. Usually, you'll make a higher down payment and slightly higher monthly loan payments (if you finance your purchase) compared to lease payments for the same car.

However, there are ways to reduce these amounts—consider buying a less expensive new car, a certified pre-owned car, or a used car.

Perhaps you've saved and invested money with a car purchase in mind. If you can afford to pay the entire cost of the car in cash, all the better as far as the ultimate cost.

Monthly car loan payments are calculated based on the sale price, the interest rate, and the number of months it will take to repay the loan.

Pros

No Restrictions

Unlike for people who lease, you're not obligated for fees related to mileage and wear and tear on the car. Since you own it, you pay for service and repairs on your own timeline.

Total Control

You also have complete control over how you improve your car or, for instance, modify its interior. If you financed its purchase, once that loan is paid off, you can keep it until it dies, trade it in, sell it outright, or give it to a family member. You get to decide.

Credit Score

Usually, obtaining a loan to buy a car requires a credit score that's not as high as that required for leasing.

Potential for Tax Deductions

If you use your car for business as well as personal reasons, the IRS allows you to deduct costs and depreciation related to that business use. You must keep careful records to support your filing, so be sure that you fully understand what's involved.

Long-Term Cost

It's cheaper overall to buy a car and hold onto it for as long as possible.

Cons

Rapid Depreciation

New cars can lose 15%-25% of their value in the first five years of ownership. If you consider your car an investment, then this is a disadvantage. However, if you are the type who buys and keeps a car for years, it shouldn't matter.

Driving Costs

According to a 2021 study by AAA, the cost to drive a new car for about 15,000 miles came to $9,666. Costs included fuel, insurance, and maintenance.

Leasing vs. Buying Summary

The Bottom Line

Deciding between leasing and buying a car will come down to each individual's lifestyle, driving needs, and financial situation.

Leasing can be attractive if you're looking for lower monthly costs, want a new car with new car technology every few years, and don't want to worry about certain tasks, such as selling your car. Leasing can put you into a luxury model than might be out of reach otherwise.

Buying a car means you'll own it outright if you paid cash or you'll build equity in it as you pay off a car loan. You'll have total control over your expenses and can service or repair it according to your needs. You'll have the freedom to drive as much as you like, modify your car, and dispose of it in on your terms.

In the long-run, buying has proven to be a better financial decision.