Is it Better to Lease or Buy a Car?

Getting a car is always exciting, whether it's your very first or an upgrade. The question you're probably asking is if you should lease or buy. Both methods of financing have their advantages and disadvantages.

Leasing a car means you'll have one low monthly payment indefinitely. Buying a car means you need to have all the cash up front, or you need to take out an auto loan. With a loan, you may pay more per month but then nothing at all. Read on to find out what's best for you.

Pros and Cons of Leasing a Car

Currently, about a quarter of new cars sold in the U.S. are leased. It's a popular choice among consumers for a number of reasons.

Pros:

• You won't have to worry about depreciation or loss of value over time. Just swap your older leased car for a newer one!

• Monthly payments are usually lower for leasing than for an auto loan.

• You might be able to lease a nicer, newer car than you can afford to buy.

• Maintenance costs will likely be low because most leased cars are new.

Cons:

• When your lease expires, you won't own the car. You'll need to extend your lease or take out a new lease.

• The interest you pay isn't declared. It's called the "money factor" and you'll need to read the fine print to see what it's costing you.

• Choices will be limited to what vehicles are available. For example, some dealers may not offer used cars to lease.

• You may have annual mileage restrictions and be charged extra if you go over.

• If your car has more than usual wear and tear, you may need to pay extra when you return the car.

Pros and Cons of Buying a Car

Around 85% of new cars are bought with financing compared to outright with cash. Either way, it's satisfying to know the car is yours but it's worth considering some pitfalls too.

Pros:

• If you buy the car outright with cash then the purchase is complete and you'll have no monthly payment.

• If you buy the car with an auto loan, you'll eventually pay the loan off and then you'll have no monthly payment.

• You have the choice to buy any car on the market within your budget.

• When it comes time to upgrade, you'll have an asset to sell or trade-in.

• The car serves as collateral for a secured auto loan, so it may be easy for you to qualify.

Cons:

• Car value depreciates about 20% over the first year of ownership then 10% every year after.

• An auto loan payment might be higher than leasing because you're paying off the total value of the car, plus interest and any fees.

• If you fail to pay your auto loan, the lender has the right to take your car.

• You'll need to cover all maintenance costs, which may increase as your car gets older.

How Leasing a Car Works

Leasing a car involves a few terms and tricks you'll need to know. Here's a breakdown:

• Upfront costs: Depending on the dealer, you may pay nothing up to thousands of dollars.

• Maintenance: Costs are usually low because most leased cars are new. You'll need to cover things like routine oil changes.

• Payments: The average lease payment is $460 but will depend on the car.

• Interest: Called the money factor, it comes in decimal form and is determined by your credit score. Multiply the decimal by 2,400 to get your interest rate.

• Early termination of a lease: There will likely be a charge to end your lease early, so be sure to read the fine print before you sign. It may be a one-off fee plus a percentage of your remaining payments.

• Extra miles: A lease payment will vary depending on how many miles you agree to use per year. If you go over, you may need to pay 10¢ to 25¢ for every mile over.

• Return fee: This is a one-off fee you pay when you return the vehicle to have it cleaned and repaired. It may be $350.

• Length of Lease: This will vary depending on your contract. For example, it could be three years, then you would extend the lease, buy the leased car, or buy another car.

How Buying a Car Works

Buying a car is relatively straightforward compared to leasing. Keep in mind the following:

• Upfront costs: You'll need to pay the full purchase price upfront or have the downpayment for an auto loan, which may be around 20% of the price. There may also be one-off loan fees.

• Maintenance: Costs will vary depending on the car you buy. As a rule, the older the car, the more repairs it may need each year. Have your car regularly serviced to avoid breakdowns.

• Payments: Your auto loan payment will depend on the term, or length, of your loan. If you want a lower monthly payment, choose a longer term. The average loan payment for a new car is $554, and $391 for used.

• Interest: The rate you get depends on your credit score. The better your credit score, the lower your rate.

How to Decide if You Should Lease or Buy a Car

If you're still wondering whether you should lease or buy a car, consider this checklist:

Buy a car if you:

• Want to eventually own the car outright with no monthly payment.

• Have the full purchase price or down payment saved up.

• Are willing to get a car model and year that fits your budget.

Lease a car if you:

• Aren't interested in owning a car and are content with a continuous monthly payment.

• Do not have a downpayment at hand and want a lower monthly payment.

• Want a car that is nicer and newer than you can afford to buy.

The Bottom Line on Leasing vs. Buying a Car

It's up to you to choose the method of car financing that fits your needs, wants, and budget. Paying cash, leasing, and getting an auto loan are all great choices.

If you're leaning toward buying a car with an auto loan, click below to find out more!