Leasing vs. buying a car outright: What’s the better money move?

You’re ready for a new ride, but determining if you should lease or buy a car can be a tricky decision. Each offers its own benefits — added flexibility versus no mileage restrictions — and really comes down to what you need in a vehicle.

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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 to drive 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 to 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.

Take a deeper dive into the benefits and drawbacks of leasing

Buying a car

When purchasing a vehicle, you can pay for it up front or use a car loan. Most car loans use your car as collateral until you pay off the entire balance — plus interest and fees. 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?

Can’t decide? Ask yourself these 9 questions

• 1. How much do I drive in a year?

  Lease contracts usually limit you to driving a certain number of miles each year. Go over and you typically have to pay a penalty per mile. If you have a long commute or regularly take trips in your car, buying a car might be a better choice.

• 2. Will I use this car for business?

  You can get a tax deduction for lease payments and on car loan repayments if you use the vehicle for business purposes at least 50% of the time. However, there are slight differences in how these deductions are calculated. Generally, more expensive cars get a better tax break if you buy. Otherwise, it’s not much of a difference.

• 3. Do I plan on making any changes to the vehicle?

  If you plan on making any modifications — or even adding a bumper sticker — buying is your best bet. Leasing companies charge for any damages or changes you make to the vehicle.

• 4. How much of a mess do I typically make in my 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 rough on their cars should consider buying instead.

• 5. How much can I spend on a down payment?

  Lenders generally require a down payment between 10% and 20% of the car’s sticker price. If you don’t have that up front, leasing a car might be a better option. If you have excellent credit and low cash flow, however, you might be able to qualify for a 0% down payment on a car loan.

• 6. How long do I plan on having this car?

  Leasing can be more expensive than buying if you plan on using it in the long term. While leases often come with a buy-out option, many borrowers have to take out a loan to cover that full payment, making it even more expensive.

• 7. What's the trade-in value on my current car?

  Got a car you’re thinking of trading in? It might not be worth as much as you think, especially if you’re thinking of buying a new car. Check the car’s trade-in price on sites like Kelley Blue Book or Edmunds to find out how much it can actually save you.

• 8. Would I rather have the latest model?

  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.

• 9. What is my credit score?

  Borrowers with good credit can often get competitive deals on both leases and car loans — that’s a credit score of about 670 or higher. However, bad-credit borrowers might find the best deal with a secured car loan, which uses the vehicle as collateral. This offsets the risk for the lender, making it easier to qualify for more favorable rates and terms.

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 they pose more risk for the lender.

5 tips for buying or leasing a new car

Whichever option you’re set on, there are a few general tips to keep you from spending too much money.

• 1. Keep an eye on your budget

  Your vehicle expenses — including your car payment, gas expenses, maintenance costs and insurance premiums — should only be 10% to 15% of your monthly budget. If your lease or loan payment pushes that line, consider scaling back on your car. A less expensive model or a used car may not be as flashy, but you’ll thank yourself when you aren’t scrimping for your other expenses.

• 2. Save up before you go shopping

  A down payment — or “cash down” in lease speak — is key to lowering your monthly car loan or lease payment. No matter which option you’re considering, be sure to have around 20% of the vehicle’s value saved up before you visit the dealership. This will reduce the amount you need to borrow or keep your monthly lease payment low, which will help you save on interest in the long run.

• 3. Shore up your negotiation skills

  The sticker price of any car — bought or leased — can usually always be negotiated down. Compare prices from different dealerships to get an idea of what’s out there.

  If you plan on buying the car, find financing ahead of time so you can head to the dealership with terms already in mind. And if you plan on leasing, get the sale price first. The other aspects of the lease can be negotiated after.

• 4. Prepare for regular expenses

  Every car comes with regular maintenance costs, so it’s up to you to prepare for them. If you bought or leased new, then many may be covered by the warranty. But you may still face charges for excessive wear and tear or mileage on your lease. And you’ll have to handle any repairs caused by non-mechanical issues.

• 5. Pay it off before you trade in

  Ending your lease early often comes with high fees, so consider driving your lease until the end of the contract to avoid this. Or if you’re thinking of trading in a car you’re still financing, consider paying off the loan first. This can help you avoid becoming upside down on the next car loan you take out.

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 ownership of the car at the end of the contract — 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 learn more about how car leases work or compare your car loan options against manufacturer lease deals to see which gets you the best bang for your buck.

Frequently asked questions

• Can I negotiate the price of a car at a dealership or with a private seller?

  Yes. Negotiating the price of the vehicle is encouraged and typically expected.

• Can I end my lease early?

  You can end your lease early, however, you’ll likely be subject to a lease termination fee.

• Are there any hidden costs for no-money-down offers?

  There may not be, but you’ll have to read the fine print to find out. Signs that it may be a bad deal are high interest rates or a sales tag way above market price.

Yes. In fact, leasing a used car can be a cost-efficient move if you plan on only driving for a few years and want a low monthly payment.