Buying vs. Leasing A New Car

Buying vs. Leasing a Car

Understanding the differences between buying and leasing is key to making an informed vehicle purchasing decision that makes the most sense for your finances, lifestyle, driving routine, and personal preferences.

The following compares the pros and cons of buying and leasing, the economics of each, and why you might choose to finance one way or another.

BUYING

Who Owns It

You can buy a car with cash or finance it and make monthly payments. Either way, it's yours.

If you finance a vehicle, you'll have to meet the obligations required by the lender, like a certain down payment amount and timely monthly payments. If you don't, they have the right to repossess the vehicle.

Most drivers don't have the cash to pay the full price of a vehicle upfront, so most people choose to finance through a dealership, bank, credit union, or private lender to cover the vehicle's value, plus interest, over a period both parties agree on, typically three to six years.

Lenders will look at your income, your credit score, and the cost of the vehicle to determine the terms and interest rates on your auto loan. After negotiating and signing some paperwork, the vehicle is yours to do as you please.

Upfront Costs

If you're financing a car, the bank will probably request a down payment as a form of security. Your down payment should range between 10% and 20% of the vehicle's MSRP to secure your car purchase. This also reduces the cost of your monthly payment.

You can also trade in another vehicle and use any equity toward your down payment. The amount of the down payment is usually based on the lender's requirements and your credit score.

Additional costs when buying include:

  • Sales tax (which can be significant depending on your state)
  • Registration fees
  • Documentation fees
  • Potentially higher insurance premiums for full coverage
  • Extended warranty costs (optional but recommended for long-term ownership)

Monthly Payments

When buying a car, your monthly payments are typically higher than leasing the same vehicle. This is because you're paying for the entire value of the car, plus interest, rather than just its depreciation during your use period.

However, these higher payments build equity in the vehicle, and once the loan is paid off, you'll have no car payments at all.

Future Value

New cars depreciate over time. In fact, within the first year of ownership, a vehicle will lose nearly 20% of its value, according to Trusted Choice Insurance. The amount a vehicle depreciates varies depending on its market value, make, model, and even the year it was manufactured.

Despite depreciation, buying a car is a great way to build equity, as long as your payments outpace the rate that its value decreases. You can use this equity to pay for your next vehicle when you're ready to get one.

Your vehicle will be worth whatever you can sell it for in the future and that depends on how well you maintain it. (Be smart and protect your investment with regular scheduled maintenance by a factory-authorized facility!)

What affects resale value:

  • Vehicle make and model (some brands hold value better than others)
  • Mileage (lower is generally better)
  • Condition (both mechanical and cosmetic)
  • Service history (regular maintenance improves value)
  • Accident history (clean history is preferred)
  • Market demand for your specific vehicle
  • Color (neutral colors typically resell better)

Customization

When you own your vehicle, you have complete freedom to modify or customize it as you see fit. This includes:

  • Aftermarket parts and accessories
  • Custom paint jobs
  • Performance upgrades
  • Extensive sound system modifications
  • Window tinting

Mileage Considerations

With a purchased vehicle, there are no mileage restrictions. You can drive as much as you want without penalty, making buying a better option for:

  • Long commuters
  • Frequent road trippers
  • Sales professionals who drive extensively
  • Rural dwellers who regularly travel long distances

End of Payments

Once you've paid off what you owe on your contract, that's it. Your vehicle is 100% yours. The lending institution will send you a lien release as proof that the vehicle is paid off and all yours.

After paying off your loan, your total cost of ownership decreases significantly, as you'll only need to cover maintenance, insurance, and fuel. This "payment-free" period is where ownership truly becomes economically advantageous compared to leasing.

Long-term Value and Reliability

Modern vehicles can easily last 150,000-200,000 miles with proper maintenance. If you plan to keep your vehicle for many years, purchasing becomes increasingly cost-effective the longer you own it.

Buying is often better for:

  • Those who plan to keep their vehicle 5+ years
  • Drivers who prefer to know their vehicle's history
  • People who value reliability over having the latest features

LEASING

Who Owns It

You don't own the car when you lease. You're paying for the use of the vehicle, but the finance institution that you leased it through actually owns it. This is usually why you pay less per month in a lease than if you were to buy the car.

Leasing also protects drivers from unexpected drops in value from unexpected circumstances. For example, if the vehicle you lease depreciates due to a recall, this won't affect you the way it would if you purchased a vehicle.

Upfront Costs

Leases often don't require any type of a down payment. All you usually have to pay is the first month's payment, a security deposit, the acquisition fee, and other fees and taxes. But, as with a purchase, if you want to lower your monthly payments, you can always pay more upfront.

Common lease start-up costs include:

  • First month's payment
  • Security deposit (often refundable if you maintain the car properly)
  • Acquisition fee (typically $395-$895)
  • Documentation and registration fees
  • Possibly a down payment or "capitalized cost reduction"
  • Gap insurance (sometimes included in the lease)

Monthly Payments

Lease payments are typically lower than loan payments for the same vehicle because you're only paying for:

  • The vehicle's depreciation during the lease term
  • Rent charges (similar to interest)
  • Taxes and fees

This payment structure allows you to drive a more expensive vehicle than you might be able to afford to purchase.

Future Value

In most leases, you don't end up owning a vehicle. Therefore, you won't be responsible for selling it. That's the financial institution's job. However, you may have mileage limits—typically between 12,000 and 15,000 miles per year—and wear and tear guidelines that, if you exceed them, could cost you extra money when you turn your vehicle back in.

Most lease terms range between two and three years, which may be attractive to drivers who like to drive a new car every few years. Leasing could also allow you to drive more car for less money, especially if you can only afford to buy a car at a lower market value.

Lease-End Options

When your lease ends, you typically have three options:

  1. Return the vehicle and walk away (after paying any end-of-lease fees and excess wear and tear charges)
  2. Purchase the vehicle at the predetermined residual value stated in your lease contract
  3. Lease a new vehicle from the same manufacturer (many dealerships offer loyalty incentives)

Some leases also offer early termination options, though these typically come with significant fees.

Warranty Coverage

One significant advantage of leasing is that the vehicle is typically under the manufacturer's warranty for the entire lease period. This means:

  • Reduced repair costs
  • Peace of mind regarding mechanical issues
  • Potential for complimentary maintenance programs
  • Roadside assistance coverage

Tax Implications

For business users, leasing may offer tax advantages. Business owners can often deduct lease payments as a business expense, whereas with purchasing, only the interest portion of the payment and depreciation can be deducted.

Note: Tax laws change frequently, and you should consult a tax professional before making decisions based on potential tax benefits.

Best Cars to Lease

The best cars to lease are those with the best book value after the term of the lease. Since they depreciate less, you pay less. Review the lease ratings to see which cars retain their value.

Vehicles with high residual values (typically 50-60% of MSRP after 36 months) often make the best lease deals. These typically include:

  • Luxury brands like Lexus, Audi, and Porsche
  • SUVs and trucks, which generally hold value better than sedans
  • Japanese brands like Honda and Toyota, known for reliability and resale value
  • Electric vehicles with manufacturer lease incentives

Mileage Restrictions

Standard leases include mileage allowances of:

  • 10,000 miles per year (low mileage)
  • 12,000 miles per year (standard)
  • 15,000 miles per year (high mileage)

Exceeding these limits results in excess mileage charges, typically $0.15-$0.30 per mile. High-mileage drivers should either:

  • Negotiate a higher mileage allowance upfront (at additional cost)
  • Consider purchasing instead of leasing
  • Carefully monitor their driving habits

Wear and Tear Considerations

Leases require you to maintain the vehicle in good condition. At lease-end, the vehicle will be inspected for:

  • Exterior damage (dents, scratches, and dings)
  • Interior condition (stains, tears, and unusual wear)
  • Mechanical condition (must be properly maintained)
  • Tire tread depth (usually must have adequate remaining tread)

Excessive wear and tear will result in additional charges. Some leasing companies offer wear and tear insurance or protection plans for an additional fee.

End of Payments

Most people return the vehicle at the end of the lease term, but some like to purchase it during their lease or at the end. Others like to trade it in before their lease is over. Just ask us about these different options before signing any paperwork and we'll make sure that you have your lease set up the way you want it.

Buying vs. Leasing: Which Is Right for Me?

Shopping for a new car is always exciting, but it can be difficult to choose between buying and leasing a vehicle. Here's a quick reference guide to help you decide:

Consider Buying If:

  • You plan to keep the vehicle for more than 3-5 years
  • You drive more than 15,000 miles annually
  • You want to build equity rather than making perpetual payments
  • You enjoy modifying your vehicles or customizing them
  • You're hard on your vehicles or have concerns about wear and tear
  • You want the freedom to sell or trade in whenever you choose
  • You're financially prepared for maintenance costs after warranty expiration
  • You don't mind higher monthly payments in exchange for eventual ownership

Consider Leasing If:

  • You enjoy driving a new vehicle every 2-3 years
  • You prefer warranty coverage throughout your ownership period
  • You drive fewer than 12,000-15,000 miles annually
  • You want lower monthly payments
  • You don't want to worry about trade-in or resale value
  • You use the vehicle for business (consult your tax advisor)
  • You prefer vehicles with the latest technology and safety features
  • You want predictable transportation costs