At some point, nearly every driver in search of a new car has faced the big question: is it better to buy or lease?
Unfortunately, there is no universal answer. How to acquire a vehicle largely depends on one’s priorities – whether it’s getting the best deal financially, having the luxury of getting behind a new set of wheels every few years or driving a car more expensive than you can afford to own. When it comes to getting the best deal, buying is generally much better than leasing. It also gives you more flexibility in how you use your car.
The Key Differences
When people decide to lease, it’s often because they’re focused on the short-term picture. Leases usually require a smaller down payment and feature lower monthly payments than a loan.
The reason is for this is that, with a loan payment, the principal amount is the entire car’s value divided by the number of months on the loan. So if you purchase a $27,000 car and have a 3-year loan, you’re paying $750 each month in principal ($27,000 sale price/36 months = $750). Of course, you’ll be responsible for interest as well.
With a lease, though, the monthly payment corresponds only to the amount the car is expected to depreciate, not the full purchase price. Suppose the dealer estimates that the car will lose half its value over the course of a three-year lease, making its worth $13,500 when the lessee returns it to the dealership. The principal payment will be only $375 a month ($13,500 depreciation amount/36 months = $375).
Does that mean leasing makes more sense from a financial perspective? Usually, the opposite is true. Unless you have a habit of buying and selling cars every couple of years, taking out a loan is probably the more cost-effective approach.
Why? Because even though you’ve paid less during those first few years, you have no equity in the car when the lease expires. So if you want to keep the car, you have to come up with the $13,500 that it’s now worth (see Car Leases: Should You Take The Purchase Option?). And because leases tend to come with higher finance charges and upfront costs – the lease initiation fee is one common example – you’d probably be better off just buying the vehicle from the start.
When Is Buying A Car Better Than Leasing?
Reasons to Buy
In addition to costing less in many cases, buying also has other advantages:
- Flexibility – If you’re on the road more than the average driver, you have to beware of mileage limits (frequently 12,000 or 15,000 miles per year) that come with a lease. Note that according to Marketwatch, drivers average 15,000 miles a year. Leasing also ties you to the car for the length of the contract. While buyers can try to sell their wheels at any time, lessees usually face early termination fees if they return their car ahead of schedule.
- Ability to customize – Some drivers like to put their own stamp on a car, whether it’s installing a new sound system or adding unique hubcaps. If you lease, though, the dealership may want you to undo the changes so it’s easier for them to sell it to other consumers. And if you do any damage to the vehicle as a result of your modifications, chances are you’ll be on the hook for those, too.
- Simplicity – Even experienced lessees often don’t understand every detail in leasing contracts, which can be fairly complicated. Buying tends to be a more straightforward process that eliminates the hidden fees.
Exceptions to the Rule
Are there certain advantages to leasing? Certainly. Because of their lower down payments and monthly expenses, leases allow you to afford a more upscale car. If you like to impress – or have a job that requires you to take out clients – that can be a big plus.
And some folks simply enjoy driving a new car every few years, especially now that technology means that more things change in a car than the way it looks or even drives. As a recent New York Times article put it, the car is evolving into "a smartphone on wheels." If that matters to you, a lease might be a worthwhile option. Just keep in mind that, compared to buying a car and keeping it for a decade or so, you’ll probably be paying more over the long haul.
The Bottom Line
While leasing continues to be popular, buying a car and keeping it for a number of years tends to be more economical in the long run. And because you don’t need to worry about the fine print in a lease, it usually gives you less to worry about. So unless new technology and a new look matter a great deal to you, buy rather than lease. For more information on leasing, see When Leasing A Car Is Better Than Buying.