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Leasing a car can be a good way to get into a new vehicle without a hefty car loan payment. But in the long run, it may make more financial sense to buy instead of lease. Understanding the numbers for each option can help you determine which option is a better fit for you.
Leasing vs. Buying a Car: What's the Difference?
If you're looking at new cars—leases typically aren't available on used ones—you may have the option to buy or lease the vehicle. When you buy a car, you can pay for it in cash or take out an auto loan to finance the purchase. You'll make monthly payments, including principal and interest, for the duration of the loan's repayment term.
Once you've paid off the loan, your lender will send you the title, and you'll own the car free and clear. If you sell the car in the meantime, you may get a profit on the sale, depending on how much equity you have in the vehicle.
With a car lease, you're essentially renting the car for a long period of time. You'll make monthly payments that cover the vehicle's depreciation and interest charges, and once your lease ends, you'll return the vehicle unless you decide to purchase it from the dealer or extend the lease.
Will Leasing a Car Save You More Money Than Buying a Car?
The decision to buy or lease a vehicle depends on more than just the costs, but it's important to understand how the math works out for each option to determine which is better for you.
When Leasing Could Save You Money
Here's how leasing might save you money over buying:
- Lower monthly payment: With a lease, you're essentially covering the cost of depreciation the car experiences during the lease period (plus interest). In contrast, a car loan covers the full cost of the car minus any down payment you make. As a result, a lease could save you money if you're focused solely on monthly payments.
- Shorter terms: New car loan terms can last as long as 84 months with some lenders, compared to a lease term of just 24 to 48 months. While a long-term car loan can help reduce your monthly payment, it'll increase your overall interest costs, which can neutralize some of the value you get from owning the vehicle.
- Lower repair costs: Since leases are typically only available with new cars, you're unlikely to need to make big repairs during the two to four years you're leasing the vehicle. If you buy a car and keep it for longer, your repair costs will go up as the vehicle ages.
When Buying Could Save You Money
On the other hand, here are some ways buying a car can save you more compared to leasing:
- Equity: While monthly payments are higher with an auto loan, you're building equity in your car each time you pay down the principal balance. If you sell the car down the road, you may be able to profit from the transaction if the car is worth more than the remaining loan amount. If you put that amount toward another car, you could save money on the next loan.
- Fees: Leases often set a limit for how many miles you can drive annually. If you exceed that threshold, you may be subject to fees. You may also need to pay fees for excessive wear and tear and a penalty if you end your lease early. When you buy a car, racking up a lot of miles and incurring excessive wear and tear could reduce the vehicle's value, but that's not a fee you have to pay out of pocket. Also, some lenders may charge a prepayment penalty if you pay off your loan too early, but they're not allowable on loans that are 61 months or longer.
Pros and Cons of Leasing a Car
Before you lease a new car, it's important to understand both the advantages and disadvantages. Here's what to consider.
Pros of Leasing a Car
- Lower upfront and monthly costs: Leases often require a low or no down payment, and monthly payments are typically lower compared to auto loans. You can also expect repair costs to be lower, so you don't have to set aside as much money to anticipate those.
- New car experience: If you like the thought of always driving a new car, a lease may be the way to go. Since you'll have the chance to return the vehicle at the end of your term, you can replace it with a lease on a newer vehicle to always have the latest technology and options.
- Option to buy: While you can return your car at the end of the lease, you have the flexibility to buy it instead if you don't want a new lease or you don't want to deal with fees for excessive mileage or wear and tear.
Cons of Leasing a Car
- Strict rules: Because you don't own the vehicle, lease agreements typically have strict rules to prevent excessive mileage or wear and tear. You also can't make any modifications to the vehicle during your lease term. If you breach the contract, you could be on the hook for hefty fees.
- No ownership: You don't own the vehicle you're leasing, so you can't sell or trade it in for a new one until you've met the terms of the lease agreement. If you break the agreement early, you could be on the hook for a penalty.
- No equity: Another downside of not having ownership is that your monthly payments aren't building equity that you can benefit from later when you sell the vehicle. The only way to eventually take advantage of it is to buy the vehicle when the lease expires.
Check Your Credit Before Buying or Leasing
Whether you're buying or leasing a new car, you may have a hard time finding an inexpensive option unless you have great credit. Before you decide to buy or lease your next vehicle, check your credit score and credit report to gauge your overall credit health and to determine whether you need to take some steps to improve your credit before you start looking.
While it can take some time to build your credit score, it could ultimately save you hundreds or even thousands of dollars on an auto loan or lease.