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At a glance: Lease or buy?
| Leasing | Buying | |
| Ownership | None | Ability to sell car after it’s paid off |
| Down payment | Typically lower | Typically higher |
| Monthly payment | Typically lower | Typically higher |
| Repairs | Often covered by warranty | Warranty or out of pocket |
| Yearly mileage limits | Typically 10,000 to 15,000 miles | None |
| Excess wear and tear | May require additional payment | Lowers vehicle value |
| Modification | Not allowed | Ability to customize car |
| Return | Return at end of lease | Typically not an option |
| Freshness | New car every few years | May need to sell or trade in for a new car |
If you’re looking for the most cost-effective option over the long term, buying a used car and keeping it for a few years after you’ve paid it off is often the best choice. But what if you like having the newest technology or the most-up-to-date safety features? Leasing might give you the freedom to make the periodic upgrades you’re looking for without breaking the bank.
The truth is there’s no one-size-fits-all option when it comes to the age-old question of lease or buy. Still, identifying some key factors related to cost and your personal preferences can help you decide what’s right for you.
Let’s look at some of the important factors you should consider before talking to a dealer.
Not sure whether to lease or buy?Explore Auto Loan Options
Lease or buy: 3 factors to consider
- Monthly costs
- Monthly payments
- Car insurance
- Overall costs
- Down payment
- Repairs
- Depreciation
- Leasing fees
- Flexibility and lifestyle
- Driving a new-model car
- Returning vs. selling
- Car payments
Monthly costs
Monthly payments
If your main goal is to get the lowest monthly payments, leasing could be your best option. Monthly lease payments are typically lower than auto loan payments, because they’re based on a car’s depreciation during the period you’re driving it, instead of its purchase price.
Residual value of a leased car: What to know
Lower monthly payments might help you balance your budget, but keep in mind that when you’re leasing, your monthly payments won’t end in ownership. That makes it likely you’ll lease again, which means more monthly lease payments. Buying, on the other hand, means knowing your monthly payments will eventually stop when you pay off the car loan.
Car insurance
Comprehensive and collision coverage may be required when you’re financing a car or taking on a lease. It could be a good idea to spring for gap insurance, too, though some lease agreements include it at no additional cost (it’s a good idea to ask whether it’s included).
When choosing gap coverage, make sure to compare quotes from different insurance companies before deciding on a plan. This can help you find the most-cost-effective option for you and can be much cheaper than buying insurance through a dealer.
Overall costs
Down payment
Thinking about financing your next car? Your required car down payment could be around 10% to 20% of the car’s total cost. The actual amount of cash you’d need to come up with can depend on several things though, including your credit scores. For example, someone with low credit scores who wants to finance a more expensive vehicle would likely have to come up with a larger down payment. A used car, or a model with less-expensive features, might be the key to a more budget-friendly down payment, particularly if your credit scores are lower.
Leasing may also require significant upfront costs, including the first month’s payment and a down payment — especially if you’re interested in negotiating the lowest possible monthly payment.
Leasing can be a cost-effective alternative to car buying — but don’t forget that you’re not putting money toward a future asset that you can sell or trade in.
While a bigger down payment might be wise if you’re buying a car, that doesn’t necessarily apply to leasing.
If you can secure solid lease terms, you’ll want to consider keeping your down payment as low as possible.
Repairs
Are you prone to getting lots of bumps and dings? If you live in a crowded city or have a long commute, you may be at risk of putting excessive wear and tear on your car.
The cost of repairs can hit both car buyers and lessees. Cars are typically leased for three years, so if you lease a brand-new vehicle it will likely be under warranty for the duration of your lease. But you may still have to pay for maintenance and repairs, and you might even be required to replace worn tires, scratched windows or other blemishes when you return the car.
As cars get older, the cost of repairs can rise significantly. If you decide to buy, you’ll want to budget for regular maintenance and upkeep.
On the plus side, once your car is paid off, the cash that previously went to your monthly payment can be set aside to help cover maintenance costs.
Depreciation
If you’re a car owner, the more miles you drive, the faster your vehicle depreciates. In fact, logging a ton of miles on your car is one of the quickest ways to reduce its resale value.
But putting lots of miles on your car can be an even bigger problem if you want to lease. Auto leases usually come with mileage limits, typically set around 12,000miles per year for a standard lease. Going over that number could mean being penalized at a rate of about 15 cents a mile.
Leasing fees
Here are some of the other unique fees you may have to pay if you choose to lease a car.
- Acquisition fee — This covers the leasing company’s administrative costs for arranging the lease.
- Security deposit — This might be roughly equal to one month’s lease payment.
- Early termination fee — You might be charged this fee if you end the lease contract early.
- Disposition fee — This covers the leasing company’s costs for cleaning and selling the car at the end of the lease.
- Excess wear and tear — You might have to pay additional fees for incurring excess wear and tear on your leased vehicle.
- Excess mileage — Fees for exceeding your agreed-upon mileage limits can add up.
Learn more about how to lease a car.
Not sure whether to lease or buy?Explore Auto Loan Options
Flexibility and lifestyle
Driving a new-model car
For many drivers, the idea of being locked into one specific car over a long time period is … less than ideal. If that sounds like you, leasing might be your best bet.
Leasing may be a good option for you if you need to have a nice car as part of your job — or you just prefer to have a fresh, modern vehicle.
Returning vs. selling
Leases may not be as flexible as you think. If you get tired of your car or your needs change, you may want to think twice about turning the car in before the end of your lease. If you break your lease early, you could be on the hook to pay some steep penalties. You could even be required to cover all of the remaining lease payments and pay additional penalties on top of any other fees. Ouch.
As a car buyer, you have more freedom to get rid of your vehicle. While it’s not ideal to sell or trade in your car at certain times, like when you’re underwater on your auto loan, you can still technically sell whenever you’d like without incurring fees — though you may still be responsible for any remaining balance owed on your loan.
That’s why knowing how often you’ll want a new car is a key factor in the “lease or buy” discussion. Not sure how frequently you plan to switch vehicles? It might be helpful to think about your previous few cars and how frequently you’ve traded or sold them in the past.
Car payments
Another factor to consider is how long you want to be making car payments on your vehicle.
If you opt to lease a vehicle, you’ll be making payments for the entire time you have the car —and you may have additional costs along the way and at the end of your lease that you owe to the dealer. On the other hand, once you pay off your car loan you won’t have any obligation to your dealer or lienholder. Car loan terms can often last longer than lease terms, but you’ll have an asset at the end of your loan that you can sell or trade in if you choose.
Should you buy or lease a car?
As with any major financial decision, it’s important to do your homework before deciding to lease or buy a car. Shopping for good rates and applying for prequalification could help you crunch the numbers and make a well-calculated decision. Ultimately, the best choice for you depends on your preferences, your budget and your ability to handle the expenses you might incur down the road.
Calculate your mileage
Estimate how many miles per gallon you got on a recent trip, commute or any kind of drive you took with our mileage calculator.
Not sure whether to lease or buy?Explore Auto Loan Options
FAQs about leasing vs. buying
Is it better to lease or buy a car?
Deciding whether you want to lease or buy a car comes down to what you’d prefer in a vehicle. Do you value driving a new car every few years, with less responsibility for repairs and upkeep as it ages? You might want to lease a car. Would you rather be able to customize your car to your needs, with the ability to sell or trade in your car after paying it off? Then buying a car might be a better option for you. It’s a good idea to research the costs and drawbacks associated with each option before making a decision.
Do you need car insurance for a leased car?
Yes, you need car insurance for a leased car. In addition to basic coverage, you may also need comprehensive and collision insurance, plus gap insurance.
Can I negotiate a lease payment?
You can negotiate certain terms of your lease, such as the mileage, cost of the vehicle and interest rate, that can help bring the cost of your payment down.
About the author: Sarah C. Brady is a San Francisco–based financial consultant, workshop facilitator and writer. In addition to writing for Credit Karma, Sarah writes for Experian, LendingTree, Magnify Money, MSN News and more. In her … Read more.
