Here’s what you need to know when you compare leasing and buying a car.
Cars are expensive. But the decision to lease a car or buy it outright depends on more than just cost. Consider how much you drive, your credit history and how much you wear and tear on a car. Read our guide to figure out what’s involved with both leasing and buying to find the option best for you.
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What’s the difference between leasing and buying a car?
It’s exciting to get a car, however it’s not always clear if buying or leasing a car would fit your lifestyle.
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. If you go over your allowed miles, you’ll likely be charged a penalty fee per mile. You can’t make any alterations on the car and the car has to remain in good condition. At the end of the lease, you’ll have the option of buying the car, starting a lease with a new vehicle or walking away completely.
Buying a car
When purchasing a vehicle, you can pay either completely outright or you can use a car loan. Most car loans use your car as collateral until your pay off your loan. But when you buy a car you don’t have to worry about milage restrictions, alterations or keeping your car in good condition.
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Not sure whether to buy or lease? Here are the pros and cons
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What other financing options are available for cars?
- Secured personal loan. A personal loan that is secured lets you use the car as collateral, giving you lower monthly payments. This presents less of a risk for the lender as they can sell the car should you default on the loan. These loans generally have lower rates and fees and are offered as a fixed or variable rate option.
- 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 a risk to the lender.
- Dealer finance. If you purchase a car from a dealership, they’ll most likely have a financing option to offer you. It’s best to do your research, as dealer financing usually comes with inflated rates and high fees.
8 tips when deciding to buy or lease
- Driving more could cost more. 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.
- Use your car as a down payment. If you own a car and are planning on purchasing a new one, you can typically trade it in to the dealership for a down payment on a new vehicle — or you could sell the car yourself.
- 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 car for less money. If you like having the latest vehicle on the market, a lease allows you more flexibility to upgrade every few years. Sometimes 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 new 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 a car.