In the debate over buying versus leasing a car, there’s no universal winner. Ultimately, many factors influence the decision, and the ideal option is usually the one that best suits your lifestyle.
Leasing and buying both allow you to finance a vehicle, but the similarities end there. In terms of affordability, leasing is usually the more attractive option, since you only pay for the car’s depreciation, plus interest, taxes, and fees, during your lease term, not the full price. However, you need to qualify for a lease, and that can be challenging if you have bad credit.
It’s usually easier to buy a car than to lease one if you have poor credit, though some leasing companies will offer options. Understanding the difference between leasing and buying a car is essential before you visit the dealership. Here we’ll break down what you need to know.
Differences Between Auto Loans and Leasing
Leasing a car is a different ball game than buying, and it's usually only available to borrowers with good credit scores.
If you’re considering leasing instead of buying, here are the main differences:
- Your name isn’t on the leased vehicle’s title
- Lessees are rarely required to make a down payment
- Leased cars have mileage limits
- You may be required to pay a refundable security deposit
- Lease payments are generally lower than financing a vehicle
Despite the differences, financed vehicles and leased cars have some similarities. If you lease, expect to pay for full coverage auto insurance, title and license fees, and a dealer’s doc fee – just like financing.
Also, since leases are reported to the credit bureaus, a good payment history on a lease can build or repair your credit report and score.
Leased vehicles are usually new cars, which often means they have a higher initial manufacturer-suggested retail price. Therefore, a lease could start at a higher price than some of the used vehicles you could finance with an auto loan.
Driving a new car with a smaller monthly payment is a big draw for most lessees. With a lease, you only pay for the time you have the car, not the full value of it, unlike financing. Most leases typically last from 24 to 36 months, depending on the leasing company and your personal preferences, whereas loans are usually 48 to 84 months long.
At the end of the lease term, you return the vehicle to the leasing company. Often, you can opt to buy the car, and this price is also set ahead of time and listed in the lease. If you decide not to purchase the vehicle, you’re usually free to walk away once you’ve paid the termination fee. However, if the car has excessive wear and tear or you go over the mileage limit, you’re likely to be charged.
When Is It Better to Buy a Car?
While leasing is usually considered cheaper than financing a car, thanks to lower monthly payments, there are instances in which buying a car is the smarter move. Drivers who want to build equity, customize their rides, or drive a lot might want to consider buying instead of leasing.
Financing a vehicle helps you earn equity – the difference between how much you owe on the loan and the car’s cash value. If you owe less on the loan than the estimated value the vehicle would sell for, you’ve got equity. This difference can be put toward future car purchases in the form of trade-in equity when you’re buying your next vehicle.
Ownership is another benefit of buying a car. Owning the car allows you to customize it as you see fit and drive it as much as you want without the mileage limits you would encounter on a lease.
Additionally, buying a vehicle is usually easier when your credit isn't the best. In fact, there are special lenders available that provide loans specifically to borrowers suffering from poor credit. One of the highlights of a bad credit car loan is that it helps you improve your credit over time.
You have a better chance of getting approved for an auto loan with bad credit. Subprime lenders look beyond your credit score to help get you approved based on income, residence stability, and employment history.
Should You Lease or Buy Your Next Car?
Whether you lease or buy a vehicle ultimately depends on your budget, lifestyle, and long-term goals. Here’s a breakdown of how the two options compare in terms of cost, ownership, flexibility, and more to help you through the decision.
| | Leasing | Purchasing |
| Ownership | You don't own a leased vehicle | Once you complete the loan, the vehicle is yours |
| Up Front Cost | The amount due at signing typically includes the first month's payment, acquisition fees, taxes, registration, and sometimes a security deposit | Down payment, taxes, title, and license fees |
| Monthly Payment | Monthly payments are typically smaller on a lease since you're only paying for depreciation, taxes, and fees | The payment on a loan is typically higher since you're paying for the total cost of the vehicle, plus interest |
| Early Termination | It can be very difficult to get out of a lease early and will sometimes cost you the rest of the lease amount, even though you're turning in your vehicle. | There are no early termination fees associated with loans. You're free to sell or trade in your car at any time as long as the loan is paid off. |
| Vehicle Return | You can turn in your vehicle, pay any fees, and walk away from leasing | If you want to get out of a vehicle you're buying, you need to sell it yourself or trade it in to a dealership |
| Future Value | When you lease, the future value helps determine how much you pay, but you don't get any equity to put toward another vehicle | When you're done with your loan, any of the value left in the vehicle is yours, and you can put it toward the purchase of a future vehicle, or sell it for cash |
| Excessive Wear and Tear | If there is excessive wear and tear on a vehicle you're leasing, you have to pay for the damages or repairs at the end of your lease | When you're purchasing a vehicle, how you treat it is up to you; any excessive wear and tear may affect the future sale value, but there's no penalty at the end of your loan |
| End of Term | You can turn in your leased car and walk away, or you can lease a different vehicle. Additionally, there is typically an option to purchase the vehicle at the lease end | Once your loan is paid off, you can keep your car, trade it in, or sell it; it's up to you since you own it |
| Customizing | Customizing is a no-no on a leased vehicle | Since you're buying the car, you're free to customize it how you see fit |
Leasing vs. Buying a Car: Which Option Fits Your Lifestyle?
Now that you understand the key differences between leasing and buying a car, you might still be wondering exactly which option is right for you. If you're still on the fence, you'll want to consider your driving style and needs, as well as your finances. Let's look at how leasing and buying match up with different lifestyles.
The Budget-Conscious Commuter
Given that monthly payments on car leases are usually much lower than auto loans, the budget-conscious shopper might want to consider leasing. In addition, most leases are covered by manufacturer warranties, which often include mechanical repairs and maintenance costs during your lease term. This can help keep costs down.
However, depending on how far you commute, leasing might not be a good fit. That's because leases have mileage limitations, usually between 10,000 and 15,000 miles per year. If you go over the allotted miles in your lease term, it could end up costing you even more. Most leases include fees for extra mileage, averaging 10 to 25 cents per mile if you go over your limit. So if you have a particularly long commute, you might want to consider buying a vehicle. To keep costs down, consider a pre-owned vehicle.
The Tech-Savvy Car Enthusiast
Love that new car smell and embracing the newest automotive tech and safety? Leasing could be the way to go. Since leases are usually offered on new cars, it's easier for lenders to estimate the car's depreciation during a two- to four-year lease term. Once your lease term is over, you can return it to the dealer and upgrade to a brand-new model. Leasing gives you the ability to drive something fresh and modern with the latest tech features.
On the flipside, if you want to customize your car with an upgraded sound system or custom lighting, it might make more sense to buy.
The Growing Family
For a growing family, there are several factors to weigh when deciding between leasing and buying a car. Here again, it boils down to your needs and finances, but buying is typically the better option.
Family life often requires a lot of driving, and opting to buy can help you avoid mileage penalties that come with leasing a car. Owning also eliminates stress about excessive wear and tear that everyday family messes, like crumbs, spills, and scratches, can put on a car. Most lease agreements charge for excess wear and tear, which can add up when your lease is up.
For a growing family, leasing can offer flexibility to upgrade to a larger vehicle in a few years without the hassle of selling or trading in.
The Long-Term Saver
If you are a long-term saver, it likely makes the most sense to buy a car, but it still depends on your priorities. Building equity is a huge benefit to buying a car. While making your monthly payments, you're investing in an asset that you can trade in or sell later at your discretion. When you're done paying off the loan and no longer have monthly car payments, that money can be used towards other investments or savings. Whereas when you lease, you are perpetually paying month-to-month.
FAQS
Is it cheaper to lease or buy a car?
While leasing a car can be cheaper than buying a car in the short term because monthly payments are typically lower, in general, leasing costs more. Leasing twice during a six-year period often costs thousands more than buying a car and keeping it for the same period.
Is buying or leasing a car better for taxes?
If you are using the car for personal use, there are no major tax benefits for either leasing or buying a car. However, if you're self-employed or use your car for business, both options offer tax benefits. The monthly payment on a lease can be 100% tax-deductible if the car is used for business purposes. On a purchased vehicle, business owners can deduct a portion of the car's cost through depreciation.
Is insurance better for a leased car or a bought car?
Leasing companies often have stricter insurance requirements than lenders, but both leasing and buying require full coverage insurance during your contract. Leasing companies require full coverage, but some expect additional coverage, too, such as gap insurance, which can add up. You'll always need full coverage while leasing, but after you finish your loan, you can drop your full coverage for something more affordable if you want.
Is it better to buy or lease high mileage?
Buying is better for high-mileage driving since leases have mileage limits, and going over those limits can get pricy. When you buy, you can drive as much as you want without worrying about extra fees.
