If you’re looking to get a new car, you’re probably wondering whether to lease or to buy. Each choice has financial implications and practical considerations to weigh.
You’ll benefit from knowing the differences between leasing vs. buying a car before you head to the dealership.
Understanding Leasing and Buying
Leasing a car vs. buying a car comes down to ownership and long-term costs. When you buy, you own the vehicle once your loan is paid off. Like renting, leasing means you make monthly payments for a set period without gaining ownership. Leasing often comes with mileage restrictions, while buying allows for unrestricted use.
Any car you choose starts losing value when you drive it off the lot. When you lease a car, you’re only paying for the depreciation during the lease term. If you buy, you absorb the full depreciation cost, but you also gain the ability to sell or trade in the car later.
Advantages of Leasing a Car
Leasing comes with several benefits that make it appealing for shorter-term savings.
Predictable Monthly Payments
Leasing a car vs. buying often means lower monthly payments compared to financing a purchase. Since you're only paying for the vehicle's depreciation during the lease term, your monthly payments are often lower than monthly loan payments would be for the same car.
Because you aren’t paying for the full cost of the car, leasing allows you to drive a higher-end model than you might be able to afford if you were financing a purchase.
Lower Maintenance Responsibilities
Leased vehicles are usually covered by the manufacturer’s warranty. Unexpected repairs are less likely with a newer model car, and routine maintenance, such as oil changes, is often included in lease contracts.
Some lease contracts include wear-and-tear protections. You’ll be charged for any significant damage, so be sure to return the car in good condition.
Negotiating Lease Terms and Calculating Payments
To negotiate the best deal on your lease, understand these two financial elements:
- Residual value: The estimated worth of the car at the end of the lease, a higher residual value means lower depreciation costs and lower monthly lease payments.
- Money factor: Similar to an interest rate on a loan, the money factor determines the financing cost of a lease. Convert it to an annual percentage rate (APR) by multiplying by 2400 to compare it with traditional financing.
To calculate lease payments, consider the vehicle’s price, the residual value, the lease term, and any fees. Online calculators can help estimate costs.
Leasing an Electric Vehicle
Leasing an electric vehicle (EV) has unique benefits, including federal and state tax incentives that may lower your monthly payments.
Disadvantages of Leasing a Car
While leasing offers flexibility and lower costs upfront, it comes with certain drawbacks.
Mileage Restrictions
Most lease agreements include a mileage limit, typically ranging from 10,000 to 15,000 miles per year. The fees for exceeding this restriction can add up quickly.
Higher Insurance Premiums
Lenders want their leased vehicles fully protected, which means higher insurance coverage levels compared to buying. To reduce the overall cost, look for cheap car insurance by comparing providers and policy discounts.
Most lease contracts also require GAP (guaranteed asset protection) insurance. This covers the difference between what you owe on the lease and the car’s actual value if it gets totaled.
Advantages of Buying a Car
Buying a car gives you full ownership and control for long-term savings and flexibility.
Long-term Cost-effectiveness
When you buy, once your car loan is paid off, you no longer have monthly payments and can sell your car later. Lease payments continue if you lease again at the end of each period.
Full Ownership
Buying a car means you have full ownership with no restrictions. There are no penalties for excess mileage, and you can modify your vehicle as you like.
Ownership is ideal if you plan to keep a car for many years. Before you buy, compare car insurance quotes to get the right coverage to protect your investment long-term.
Disadvantages of Buying a Car
For all its benefits, buying a car comes with some downsides.
Higher Initial Cost
The initial cost of buying a car is higher due to down payments, sales tax, and loan terms. Monthly loan payments can also be more expensive than lease payments.
If you have a lower credit score, you’ll likely face a higher annual percentage rate (APR) on your loan, increasing your total cost.
Potential for Higher Maintenance Costs
As cars age, maintenance costs increase. Unlike leased vehicles covered under warranty, vehicle owners are responsible for repairs once the warranty expires. This can lead to unexpected expenses, especially for older cars.
Financial Considerations
To make the right financial decision on your next car, consider the total cost of ownership including your insurance premium. The cheapest cars to insure can potentially lower your overall expenses.
Lease contracts come with lower monthly payments but don’t build equity. For example, leasing a $36,000 car for three years with $2,000 upfront and $400 monthly totals $16,400 in payments. At the end, you’ll need to sign a new lease agreement or purchase the car.
Financing the same car with $600 monthly payments for five years costs $36,000. However, after five years, you’re done with payments and own the car.
"Lease Here, Pay Here" Dealerships
Some dealerships offer in-house leasing options, often targeting buyers with lower credit scores. These agreements may come with high fees, unclear terms, and unfavorable conditions. Always review lease contracts carefully.
Whether You Lease or Buy, Insure Your Car with EverQuote
When it comes to leasing vs. buying a car, you need the right auto insurance no matter what you choose. Insurance rates vary based on your location, driving history, and vehicle type. Be sure to compare providers and car insurance discounts to find the right coverage. It’s easy to compare your options in minutes with free quotes from EverQuote.