There are key differences between financing and leasing that you should be aware of when making such an important decision. Which option works best for you depends on several factors, including your needs, your preferences and your finances.
What is the difference between leasing and financing a car?
When it comes to getting a new car, you have to not only choose the right vehicle but also decide between buying and leasing. Your current financial status, budget, average yearly mileage, taste in vehicles, credit history and financial goals should all affect this decision. However, it helps to understand what each option really means first.
Buying a car means you have complete ownership of the vehicle, while leasing is more like renting. The problem is that most people use auto loans to finance vehicle purchases, and both loans and lease agreements involve making a down payment followed by monthly payments for a set period. So what are the major differences between financing a car and leasing one?
Once you pay off your loan after several years, you own the vehicle. This is why buying a new or used car is the way to go if you eventually want to be free of a car payment. Even though cars depreciate quickly, as long as you keep the vehicle in good condition, it should still hold some value. This means you can choose to sell it or use it for a trade-in if you ever need money.
You can also use it in any way you see fit and customize it the way you want. You are also responsible for maintenance, upkeep and, optionally, purchasing an extended warranty once the vehicle’s original warranty has ended.
Always shop around for the best price, even if you’re leasing.
Leasing a car, whether it's through an online car buying site or at a local dealership, is similar to renting an apartment. You enjoy the vehicle for a monthly fee, but you don't own it and don't bear the responsibilities that come with long-term maintenance and upkeep. Even though leasing is far cheaper than buying, it has its limitations in terms of miles you can travel, places you cannot take the vehicle (such as a cross-state trip), and keeping the car safe and in returnable condition.
To lease a car, you only need to pay an initial down payment and the monthly lease payments. All costs associated with maintenance are the responsibility of the lessor. You can purchase the vehicle after the lease is over, but your monthly payments essentially go down the drain if you don't choose to keep the vehicle at the end of the lease.
Compare and contrast
Here’s a quick point-by-point breakdown of some differences between leasing and financing.
- Buying a car: You can pay the full price at the time of sale, but most people finance their car purchases. With a loan, upfront costs may include your down payment, taxes, registration and other dealer fees.
- Leasing a car: Upfront leasing costs could include the first month's payment, a security deposit, an acquisition fee, title fees, registration fees and other dealer fees.
Payment term lengths
- Buying a car: Payment terms are typically stretched out for four to five years. It's not recommended to go with a longer term because the vehicle will depreciate and may leave you “upside down” on your loan.
- Leasing a car: A normal lease runs 24, 36 or 48 months. Be careful of leases longer than 36 months. The factory warranty may run out and leave you with the costs of repairs.
- Buying a car: Loan payments are typically higher than lease payments. This is because you're paying off the full purchase price of the vehicle plus interest and other finance charges, such as taxes.
- Leasing a car: When leasing a vehicle, you're only paying for the amount you're using the vehicle. Mileage, your down payment and residual value are all calculated into your payment.
- Buying a car: The future value of your vehicle is based on its wear and tear, mileage, depreciation, market demand and age. This value can vary on a monthly basis.
- Leasing a car: At the start of the lease, the vehicle's market value is based on a residual value. This will predetermine the value at the end of the term and cannot be negotiated.
- Buying a car: There are no limits to mileage. Driving excessive or minimal miles should only affect maintenance costs and resale or trade-in values.
- Leasing a car: Leasing a vehicle comes with mileage restrictions. Standard choices are typically 10,000, 12,000 or 15,000 annual miles. If you regularly drive under 10,000 or over 15,000 miles every year, leasing is not the best choice. Overages can get expensive, and costs will vary based on your vehicle.
Wear and tear
- Buying a car: Any dents, dings, or wear and tear will lower your trade-in or resale value. You are also responsible for the repairs and maintenance.
- Leasing a car: When the lease term ends, you are responsible for returning the vehicle with any repairs and maintenance performed per the owner's manual. If not, the leasing company will invoice you for repairs and maintenance.
Pros and cons of leasing a car
For some people, leasing is a better option than buying, but it still has its pros and cons.
Benefits of leasing a car
With a lease, you can buy the vehicle at the end for a prearranged price.
Leases tend to offer lower monthly payments than a loan for the same vehicle, and you don’t always have to put money down on a lease.
An additional benefit of leasing is that you can typically get a new vehicle approximately every three to five years. It's still important to have car insurance and keep the vehicle in good condition, but you shouldn't need to worry about major repairs because of the manufacturer’s warranty. Be careful to avoid leasing a vehicle that's no longer under the factory warranty, though.
If you run a small business, there are potential tax breaks that come with using a leased vehicle for your business, too. To gain the most advantage, it's important that you use the vehicle at least 50% of the time for business purposes.
Disadvantages of leasing a car
One disadvantage to leasing is the mileage limit that the lessor puts on the vehicle. You can typically only put between 10,000 and 15,000 miles on the odometer each year. Your lease agreement should state the number of miles you can use through the end of the lease. At the end of the lease, there may be a fee for mileage overages, which can be steep in some cases. If you do drive a lot, you may want to consider an open-end lease, which will be better for you in terms of mileage.
In most states, additional insurance coverage is required when you have a leased vehicle. This can include collision insurance, comprehensive insurance and gap insurance. It's important to factor the cost of this insurance into your budget, but exact rates vary based on the location, model and year of your vehicle.
Finally, with a leased vehicle, you will always have a car payment. If you eventually want to be free of this expense, buying a car may be a better option.
Pros and cons of buying a car
Purchasing a vehicle also has its upsides and downsides.
Benefits of financing a car
While leases are most common with new vehicles, you can purchase a new or used vehicle. Used vehicles are often cheaper and don’t depreciate as quickly as new vehicles. Plus, the used market exponentially increases the number of cars available as you shop for a new vehicle.
Vehicle owners can also do pretty much whatever they want with their vehicles, including customizing the interior and adding optional features. This freedom is important to car enthusiasts.
There also aren’t any mileage restrictions with financed vehicles. You can drive as much as you want as often as you want because you don’t have to worry about mileage overages. The latter could be a very important factor if you drive a lot or want to take road trips often.
Another benefit is being able to sell your vehicle at any time. Once you've purchased the vehicle and the title is completely in your name, it's yours to sell whenever you choose for whatever amount you’d like. This is also important if you’d like to eventually give the vehicle to a child or friend.
The cost of insurance is generally lower on a car you purchase than on a car you lease, too.
Disadvantages of financing a car
Buying a car means you’re responsible for maintaining it, including repair costs and scheduled maintenance. These costs could include fixing malfunctions, replacing defective parts and paying for damages resulting from an accident, depending on your warranty status and insurance.
Another disadvantage is that buying a vehicle often requires a larger down payment. A bigger down payment does make the rest of your payments smaller, but not everyone has the savings to put a lump sum down.
The monthly payments on a car loan are also significantly higher than on a lease. However, loan payments do eventually go away, which isn’t the case if you’re perpetually leasing new vehicles.
Leasing vs. buying FAQ
- Is leasing a car worth it?
- It depends on your preferences. There’s no monetary return to leasing, but it does have other benefits. One major advantage to leasing a vehicle is that there is no long-term commitment. Lower payments will save you money, so you can drive a newer, possibly safer vehicle. Read the leasing terms and fine print before making a decision.
- How long do car leases last?
- A normal lease runs approximately 24, 36 or 48 months. Be careful to check the details of leases longer than 36 months — the factory warranty may run out and leave you covering the costs of repairs and maintenance.
- Do lease payments go towards a purchase?
- Yes, but not directly. At the end of the lease, you can choose to return the car and walk away, or you can buy the car by paying a lump sum (considered the car’s residual value). This means your monthly payments are essentially covering the vehicle’s depreciation while you have it. In many cases, you can negotiate ahead of time if you do plan to purchase the vehicle you have leased. However, it's typically not wise to buy a car off-lease unless its current value is higher than the residual value or the mileage is excessively low.
Bottom line: Is it better to buy or lease a car?
Whether buying or leasing is better for you depends on several factors, such as your budget, your average yearly mileage, your financial plans and your taste in vehicles. At the end of the day, the most important thing is that you do your research, ask questions and make an informed decision.
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