Pros and Cons of Leasing vs. Buying a Car
A new or used vehicle is one of the most significant expenses individuals and families incur, other than housing costs. If you don't want to deal with an auto loan or you find it too daunting to save up for the full price of a car, you may want to consider leasing a vehicle. It is not for everyone, though.
Vehicles, whether leased or financed, are considered a typical cost of American life by many people. Leases often are cheaper in the short term, but in the long run, purchasing a vehicle is generally less expensive. Weighing the pros and cons will help you come to the decision that is right for you and your family.
Pros and Cons of Leasing a Car
A car lease is a contract in which one party permits another party to a vehicle for a specified period of time in exchange for periodic payments, usually monthly installments. Unless your contract has the option to purchase the car at the end of the contract period, you must turn it back over to the lessor.
Lower monthly payments
Better warranty protection
Option for a new car every 2–4 years
Stable and predictable income necessary
Likely to pay more over time
Benefits of Leasing
A typical car lease payment can be significantly lower than your monthly payments would be if you were purchasing the same vehicle and financing it with a traditional personal auto loan. That's because lease payments are based on the depreciation in value of the vehicle over the course of the lease period instead of the vehicle's full value.
Your newer vehicle will likely remain under warranty throughout the lease period and, therefore, rarely require anything more than routine maintenance. With a lease, you never have to worry about any mechanical failures. No matter what, you’ll be covered
Drivers can lease a vehicle that is nicer and more expensive than one they could afford to purchase. Leases generally run for two to four years, and when they expire, you are eligible to sign a lease on a new car. When your lease is up, you don't have to go through the time-consuming resale process. You can jump right into a new leased vehicle and leave the sales hassle to someone else.
Drawbacks to Leasing
Making monthly payments throughout the life of your lease requires a stable and predictable source of income. When you have a lease, it is harder to get out of the contract than it might be to sell a used vehicle.
Car leases typically have a stated (but negotiable) maximum number of miles that the lessee can drive the vehicle per year, known as the mileage allowance. The standard mileage allowance for a private driver lease normally ranges from 10,000 to 15,000 miles per year. If a driver exceeds the mileage allowance, they'll be charged an additional fee per mile. If you do decide to take on the responsibility of a lease, make sure you read the fine print.
Although a lease has a lot of great perks, you’ll often pay more in the long run for a comparable vehicle if you lease it rather than buying it. Leases can also come with many fees and penalties. Upfront fees may include down payment, security, and license fees. Penalties may include default charges for late payments, fees for ending the lease before the agreed-to period, and wear-and-tear charges.
Simple things like procrastinating on regular maintenance can cost you a lot of extra money
While selling a vehicle is seldom a money-making operation, you’ll at least get something in return for your vehicle rather than driving (or walking) away with nothing once your lease is up.
Buying a Car: Pros and Cons
The difference between leasing a car and financing a car is that with financing, you are purchasing the vehicle. You will still make monthly payments, but at the end of the term, you'll own the car.
Freedom to customize the vehicle
No end-of-lease charges
Higher monthly payments
Post-warranty repair costs
Benefits of Buying
Each payment goes toward owning your car outright. Most car loan terms are 4-6 years. After paying off your loan, you can choose between driving the car without payments, trading it in for a new model, or selling the vehicle. If you take good care of the vehicle, the resale value can help you recoup some of your expenses.
The ability to do whatever you want whenever you want with your vehicle without the fear of additional fees is a great feeling. Even if you have a loan, the car is yours to do with as you wish. When you own your car, you can drive as much as you want and customize to your heart's content.
You can also drive as many miles as you want without worrying about penalties. There also are no wear-and-tear fees when your loan runs out, as there often are with leases. As long as you are committed to driving your vehicle for an extended amount of time and have adequate car insurance coverage, you are unlikely to lose out financially.
Drawbacks to Buying
With a loan, you're paying for the full value of the car over a few years, which means your monthly payments usually are higher than a lease.
It can be incredibly frustrating when your newly purchased car has a major mechanical problem shortly after the warranty runs out. But when you own a car past its warranty expiration, the costs of all repairs fall on you. As well, excessive mileage and wear and tear will harm your car's resale value, and you’ll be responsible for trading or selling your used car if you want a different one.
The Bottom Line
Choosing whether to buy or lease a car is a serious financial decision. Research terms, compare payments, and calculate how much you'll pay in each scenario over the long term. Remember: Negotiation is always necessary, whether you opt to buy or lease a vehicle.
U.S. Bureau of Labor Statistics. "Prices & Spending." Chart 1. Accessed April 23, 2020.
Board of Governors of the Federal Reserve System. "Keys to Vehicle Leasing: End of Term." Accessed April 18, 2020.
Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 23, 2020.
Board of Governors of the Federal Reserve System. "Keys to Vehicle Leasing: Mileage." Accessed April 18, 2020.