Are you planning to get a new car soon? You may be torn between buying or leasing your next vehicle, and for a good reason. Buying means you’ll pay more each month than you would if you decided to lease. However, you’ll get to keep the vehicle when the loan is paid off, but with a lease, you’ll have to return it to the dealership.
Read on for guidance on how to decide if buying or leasing is best for your financial situation.
Buying vs. Leasing a Car: An Overview
Buying a Car
Purchasing a vehicle using an auto loan entails borrowing the funds you need from a bank, credit union and online lender. Once you’ve found the vehicle you want, the lender pays the dealership directly, and you remit payment to the lender in monthly installments for the loan term. Once the loan is paid in full, the title is transferred to you, and the vehicle is yours to keep.
Here are some of the perks associated with buying a car:
- The vehicle is yours to keep once it’s paid off.
- There are no mileage limitations.
- You won’t have to worry about termination fees.
- There are no penalties for excess mileage or wear and tear.
Leasing a Car
When you lease a car, you make payments to the lessor (or dealership) for a set period that’s known as the lease term. The monthly lease payment is typically cheaper than what you’d pay if you were purchasing the vehicle since you’re only covering the cost of depreciation since you’ll return the vehicle when the lease ends.
Like buying a car, leasing a car also comes with a host of advantages:
- You can drive the latest model for a monthly payment that’s more affordable and works for your budget.
- You’ll be covered against costly repairs under the manufacturer’s warranty.
- Some dealerships include scheduled maintenance free of charge in lease agreements so you can avoid added maintenance costs.
- You may be able to write off lease payments if you’re self-employed.
- You’re not obligated to keep the car and can switch to something else when the lease term ends.
Buying vs. Leasing a Car: Key Differences
You should also understand the key differences between buying and leasing to make an informed decision.
Up-front Costs
- Buying: You can make a down payment to reduce the total loan amount – some lenders require it depending on your financial profile. There’s also sales tax along with title and registration fees that are due upfront, although you may be able to roll these costs into the loan.
- Leasing: The down payment on a lease often includes a refundable security deposit, acquisition fee, the first month’s payment and other applicable taxes and fees.
Monthly Payments
- Buying: You can expect a higher monthly payment since you’re paying the total purchase price of the vehicle.
- Leasing: The monthly payment is generally lower since it only covers depreciation for the time you use the vehicle plus any applicable taxes and fees.
Ownership
- Buying: You keep the vehicle once you pay off the loan.
- Leasing: You return the vehicle when the lease ends unless you choose to buy it out.
Taxes
- Buying: You’ll pay taxes up-front on the purchase price of the vehicle.
- Leasing: The amount of taxes you pay depends on the location of the dealership and the applicable state laws.
Mileage
- Buying: There are no mileage restrictions. However, cars with excessive mileage tend to carry lower values.
- Leasing: You’ll be capped at a mileage limit – typically between 10,000 and 12,000 miles – and pay a fee for each mile you exceed.
Future Value
- Buying: Depreciation will reduce the value of the vehicle. However, you may find you have equity in your car after you’ve made payments for some time, and you may be able to access it by selling the car to someone else.
- Leasing: You won’t have access to the equity in the car since it isn’t yours, and the decrease in value won’t be your concern.
Warranty and Maintenance
- Buying: The responsibility for maintenance falls on the buyer. Major system repairs are only covered if the manufacturer’s warranty is intact or you purchase an extended warranty or vehicle service contract.
- Leasing: You may have to pay for maintenance unless you purchase a maintenance package. An extended warranty or service contract isn’t needed.
Customizations
- Buying: You can customize the vehicle however you see fit. Be mindful that it could result in your warranty being voided.
- Leasing: Customizations on leased vehicles equal hefty fees unless you have them removed before you turn the car in.
Early Termination/Return
- Buying: You’re free to sell your vehicle whenever you see fit. But if you owe more than the sales price, you’ll have to pay the difference to the lender. Otherwise, the profit is yours to keep.
- Leasing: When your lease ends, the lessor will assess a return fee to cover the cost of preparing the vehicle for sale. You’ll also pay a hefty fee if you end the lease early. However, you could avoid these fees if you lease another or purchase another vehicle from the dealer.
End of Term
- Buying: You’ll be off the hook for monthly payments once your car loan is paid in full. Plus, you’ll have a vehicle in your possession that can be sold or traded to make a down payment toward your next ride.
- Leasing: You’ll have to buy the lease out or turn in the car and purchase another vehicle when the term of the lease ends.
When It May Be Best to Buy a Car
- You have enough cash on hand to make a sizable down payment and avoid having negative equity.
- You plan to keep the car once it’s paid off.
- You drive a lot and don’t want mileage restrictions.
- You’re open to purchasing an extended warranty or service contract to cover repair costs should issues arise with the car in the future.
When It May Be Best to Lease a Car
- You don’t have a ton of cash at your disposal to make a large down payment.
- You have good or excellent credit.
- You enjoy driving the latest models but prefer a lower monthly payment.
- You don’t want to concern yourself with major repairs.
- You generally don’t keep cars for an extended period.
Consider Leasing, Then Purchasing Your Lease
If you aren’t completely sold on the idea of purchasing your next ride and would like to give leasing a try, go for it. You can always buy out the lease at the end of the lease term.
