How to decide between temporary and long-term financing.
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Is it better to buy or lease a car?
It depends on your individual situation. Generally, leasing might be best if you plan on getting a new car in a few years. Buying might be a better choice if you want to make alterations to the vehicle or you want to own your car. To decide which is better for you right now, you need to understand how leasing and buying works.
Leasing a car
When you lease a vehicle, you’re essentially borrowing it for a few years. Your contract allows you a predetermined number of miles each year — typically between 10,000 and 12,000 — and charges a fee if you go over. You also can’t make any alterations on the car and the car has to remain in good condition. At the end of the lease, you may have the option of buying the car or starting a new lease. And if you decide you want to buy a different car instead, you can do that, too.
Buying a car
When purchasing a vehicle, you can pay for it upfront or use a car loan. Most car loans use your car as collateral until your pay off the principal with interest. However, you’ll still own your car outright — your lender will simply have a lien against it should you default. And when you buy a car, you don’t have to worry about mileage restrictions, alterations or keeping your car in good condition.
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What are the differences between buying and leasing a car?
| Buying | Leasing | |
|---|---|---|
| Who owns the car? | When you buy a car, you own it — your lender only has a lien against the vehicle should you fail to repay. Because of this, there are no limits on how long you can keep your car or how much you can drive it. | A lease is more like an extended rental period. However, most lease contracts give you the option of buying at the end of term, sometimes at a discounted rate. |
| What are the upfront costs? | Usually a down payment of 10% to 20% of the car’s value as well as registration costs, fees and taxes. | It may include a down payment, a security deposit, an acquisition fee, the first month’s payment and other taxes and fees. |
| How large are the payments? | Car loan payments can be quite hefty, especially if you choose a shorter loan term. You’ll be paying back interest and principal, so use a calculator to see how much it might cost you. | Since you aren’t paying for the car itself, your payments will be smaller. Lenders charge interest as well as fees for vehicle depreciation and mileage, should you go over your limit. |
| Do you need to worry about maintenance? | Yes, but not for return value. By conducting regular maintenance and avoiding excessive wear and tear, you can keep your car functioning for years to come. | Yes. Beyond regular maintenance, you’ll need to pay for any excessive wear and tear that happens to the car during the lease period. |
| Are there mileage limits? | No. Since you own the car, you can drive it as much or as little as you want. | Yes. Most lease contracts limit you to a certain amount, usually between 10,000 to 15,000 miles. If you go over this, you’ll likely have to pay a charge per mile. |
| Can you end the contract early? | Yes. As long as you have the money to pay back your lender, you can pay off your loan at any time. However, be aware of any closing costs or prepayment penalties your lender might charge. | Yes, but there will likely be high fees and charges attached to ending your contract ahead of schedule. |
| What happens at the end of the loan term? | You’ll own your car, free and clear. You can sell it or keep it, whichever you choose. | If you have an open-end lease, you must purchase the car. If you opted for a closed-end lease, you can walk away from the term, either buying or leasing a different vehicle instead. |
Benefits and drawbacks of buying vs. leasing
Buying a car
- You own your car outright and can use it for trade-in value when you sell
- Buying is considered the most cost-effective option by many experts
- You can drive as many miles and can customize your car without penalty
- It may cost more money upfront, and longer terms mean more interest
- The value of the car depreciates in time, making your investment less valuable
- You’re responsible for repairs when the warranty expires
Leasing a car
- It requires less money upfront and often has lower monthly payments
- No need to worry about selling the car once the lease expires
- It gives you the option of buying your car at the end of the lease
- It limits the number of miles you can drive and must be properly maintained to avoid extra fees
- You’ll be unable to make any alterations to the car
- You don’t have equity in the car and often can’t use it for trade-in value
8 more factors to consider
- Limited miles. Lease agreements usually allow you to drive a certain amount of miles annually, so consider your commute and any trips you’ll take with your car. A lease may not be suitable if you travel frequently.
- Consider trade-in value. If you own a car and are planning on buying a new one, you can typically trade it in to the dealership for a down payment on a new vehicle. However, your vehicle may not be worth as much as you think, especially if its an older model.
- Tax deductions for business use. If your car is mainly used for business, you could write off both lease and car payments towards tax deductions.
- Good credit can get you better rates. If you have great credit, but not a lot of money for a new car, leasing a vehicle can get a you a better car for less money. With good credit you could get more affordable monthly payments than buying a car.
- Secured loans best for poor credit. If you have negative marks on your credit, consider a secured loan to buy a car. You’ll get lower rates and have a better chance of approval by taking out a loan using your car as collateral.
- Newer cars for less money. If you like having the latest vehicle on the market, a lease allows you more flexibility to upgrade every few years. And depending on your contract, you can trade in your older lease and get a newer model for the same monthly payments.
- Leases don’t allow car modifications. If you think you’ll add a new exhaust system or racing stripes to your car, consider buying. Lease agreements restrict you from making any modifications and will charge fees if you do so.
- Take care of your car. Lease agreements typically have a “wear and tear” clause that states the person leasing will be responsible for any damages that exceed average wear and tear — such as stains, dents, rips and scratched rims. So drivers that park on city streets, drive with dogs in the car or are generally tough on cars should consider buying instead.
How else can I pay for a car?
- Secured personal loan. A secured personal loan lets you use the car as collateral, giving you lower monthly payments. This is different from a car loan because your loan funds can be used for more than just the purchase of a vehicle.
- Unsecured personal loan. An unsecured personal loan can be used to finance a vehicle — or anything else you want to buy. These loans are flexible, but they usually come with higher fees and rates because it’s riskier for the lender.
Bottom line
Opting for a lease can offer the flexibility and luxury many drivers crave at a fraction of the cost of buying. But with limited return on value — and no property left over — it’s often considered a more expensive move. Buying a car won’t allow you to upgrade every few years, but it will give you access to a stable vehicle that you can drive where and how you want.
The best decision will depend on your financial needs. You can compare your car loan options against manufacturer lease deals to see which gets you the best bang for your buck.
