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When it's time to shop for a new car, consumers face an often confusing choice: lease or buy? To decide if you should lease or buy a car, it's important to consider several factors, including costs, limitations, preferences and more.
Both options have their advantages and disadvantages, which means that—just like nearly everything else in personal finance—deciding what's best depends on your individual needs and assets. Here's what to consider before you make a decision.
What to Know Before Leasing a Car
A car lease allows you to drive a new car without needing to take out a loan or put down a large amount of money. Instead, you may need to make a small down payment, then a monthly payment for the term of the lease. Once the term is over, you can extend the lease, return the car, buy it or trade it in for a new lease.
Lease terms can vary based on your creditworthiness, down payment, income and other factors, which may vary from dealer to dealer.
Benefits of Leasing a Car
People who lease a car instead of buying get to take advantage of many benefits:
- Lower monthly payments: When you lease a car, you're paying only for the time that you'll be driving the vehicle. Your cost is based on the difference between what the car's value is when you lease it and the residual value—what the dealer projects the car will be worth when you bring it back at the end of the lease.
- Smaller down payment: Because you're not buying the car and there's no loan involved, leases typically don't require as high of a down payment as auto loans. And while it may be smart to put more money down on a lease than required to lower your monthly payment, you may not need to if the terms are good.
- Fewer repair expenses: New cars tend to have fewer repair needs than used ones, and even if you do need to have a lease serviced, it may be included in the vehicle's warranty. Maintenance will be mostly on oil changes, tires and brakes.
- New car experience: With most leases running just 36 months, you'll always be driving a brand new or nearly new car. Leasing also gives drivers the chance to get a bigger or more deluxe vehicle than they could afford if they were buying it outright.
- Less hassle: The end-of-lease process tends to be less complicated than if you were to have to sell a vehicle you no longer want. You don't have to worry about getting the vehicle ready for viewing, vet buyers, negotiate a price or deal with transferring the title. Once your lease is over, the dealership will take care of the process.
Disadvantages of Leasing a Car
While there are plenty of pros to leasing, there are also some cons to think about before you choose to lease:
- Lack of ownership: Leasing a car means that you're always beholden to the terms of your lease agreement, something you wouldn't need to worry about when you own a car outright after paying off an auto loan. You also can't modify the vehicle for any reason.
- Restrictions of use: Most affordable leases can severely limit how much you'll be allowed to drive, typically restricting you to 12,000 or even 10,000 miles or less per year. If you drive beyond the limit, you'll pay a surcharge for each additional mile, typically between 10 cents and 25 cents per mile. With nearly 25% of U.S. workers commuting more than 42 miles per day to their jobs, according to the U.S. Department of Transportation, additional mileage costs can quickly add up, making leasing far less of a bargain.
- More expensive in the long run: Financially, leases add up to be more expensive over time than owning, simply because you're always making a car payment. What's more, driving a new car off the dealer lot results in a huge loss to the car's value as its status goes from "new" to "used," and you'll constantly be paying for that loss every time you take on a new lease. Finally, you may be required to purchase GAP coverage, which helps pay the difference between what you owe and the vehicle's value if the car is totaled.
- No cash for the next car: When you buy a car and have positive equity—the car is worth more than you owe—selling it gives you a big chunk of cash you can use for your next purchase. With a lease, however, you won't get that. Also, end-of-lease costs can be expensive if there's a lot of wear and tear or if you terminate the agreement early.
- Complicated terms: Lease agreements have a lot of fine print that can be difficult to understand. If you don't want to live by a complex set of rules every time you drive, it may be better to buy.
What to Consider Before Buying a Car
The process of buying a car is a little more complicated than leasing, but it has its advantages. You can buy a new or used car from a dealership or a private party. If you're buying from a dealership, you may be able to trade in a current vehicle to lower the sales price of the transaction.
Whether you buy from a dealer or a private party, you'll likely need to negotiate the price to get a deal on the sale. You may even want to check with multiple sellers in the area to get an advantage.
Unless you buy the car outright with cash, you'll need to get an auto loan to finance the purchase. You can get a loan directly from the lender, work with one of the lenders the dealer partners with, or find your own lender, such as your bank or credit union. You may be required to make a large down payment to get approved.
Auto loan terms, including the interest rate, can vary based on your creditworthiness, income and other factors. Once the loan closes, you'll make monthly payments of principal and interest, during which time the lender holds on to the vehicle's title. After you've paid off the loan, you'll receive the title and own the vehicle outright.
Benefits of Buying a Car
If you're thinking of buying instead of leasing, there are several perks you'll get with the process:
- Car ownership: Even while the lender holds the title, you can do just about anything you want with your car, including making modifications and driving as many miles as you want. Typically the only requirement you'll see from a lender is a minimum amount of auto insurance coverage.
- Cash for the next car: If you get tired of your car after a while and have positive equity, you'll have some cash left over from the sale that you can use to make a down payment on the next one, potentially saving you money.
- More savings over the long term: While the monthly payment on a lease can be lower than on an auto loan, the payments don't end when you lease a new car. Once you pay off a loan on a car you've purchased, on the other hand, you own the car outright and your only expenses include maintenance and repairs.
- No end-of-lease costs: While there may be some costs associated with selling a car, you don't have to worry about paying for excessive wear and tear or mileage surcharges as you would with a lease agreement.
Downsides of Buying a Car
While there are some good reasons to consider buying a car, there are others that may give you reason to rethink it:
- Higher sales costs: When buying a car, you will likely need to put down more money than you would with a lease. If you don't have a lot of cash on hand, this can be a big roadblock.
- Higher monthly payments and repair costs: Auto loans are typically more expensive in the short term with higher monthly payments that include interest charges. Also, if you plan to keep the car longer than a few years, you'll likely pay more over time for maintenance and repairs, especially after the manufacturer's warranty runs out.
- Depreciation: Whether you buy a new or used car, its value will depreciate over time. If the car loses value faster than you pay down the loan, you may end up with negative equity. If this happens and the car gets totaled, or you want to trade it in or sell it, you'll need to make a lump-sum payment to the lender to cover the shortfall the sale creates. If you can't do that, you may end up being stuck with a car you can't afford or no longer need until you have positive equity.
What Credit Score Is Needed to Lease or Buy a Car?
Leasing a car can be more difficult than buying one if your credit isn't in great shape, primarily because leases typically apply only to new cars, while you can get an auto loan for an inexpensive used car. Here's what you need to know for each.
Credit Score Required to Lease a Vehicle
It's best to have at least good credit if you're looking to lease a new vehicle. While it's technically possible to get a lease with bad credit, it's generally not a good idea. Not only are options limited, but you may have to pay exorbitant fees that can make getting a new car unaffordable.
If you don't need to replace your current car anytime soon, it may be best to work on improving your credit before you apply for a lease or auto loan:
- Check your credit score and report to spot areas that need to be addressed.
- Look for and report any erroneous information on your credit reports.
- Get caught up on past-due payments and pay debts on time going forward.
- Keep your credit card balances relatively low.
- Avoid unnecessary borrowing.
If you don't have time to work on improving your credit, know that a lease can help you build credit as you pay your bill on time each month. While a high cost loan or lease isn't ideal, it may be able to help set you up for better terms in the future.
Credit Score Required to Buy a Car
Your credit score is often directly related to your chances of getting approved for a car loan and the interest rate you'll pay. That's because in the lender's eyes, the lower your score, the less likely you are to repay the loan on time, and denying applications and charging higher interest rates are ways to avoid or mitigate that risk.
So while it's possible to get a car loan with bad credit, it can be expensive. Instead, work on building your credit if you have time. If you don't, car loans can also help you establish a positive credit history as you make your monthly payment on time.
Which Option Is Right for You?
The decision between buying and leasing a car comes down to a choice of flexibility and affordability versus long-term costs and personal preferences.
If you don't have a lot of cash to spend, want low monthly payments and hope to avoid any risk of major repairs, a lease can make sense. On the other hand, if you want long-term affordability, a wider choice of vehicles and the option to drive your vehicles long and hard, purchasing can seem like the best way to go.
Understand Your Credit Situation Before You Lease or Buy
Regardless of which option you choose, know what your credit looks like before you start the process. Check your Experian credit score to see where it stands and look for ways to improve it before you lease or buy. This can not only give you an idea of your approval chances but also help you see what areas you need to address.