Should you lease or buy a car?
Fact-checked with HomeInsurance.com
Acquiring a new car is a major decision, and deciding whether to lease or buy depends on your financial situation and what you want out of the car you drive.
Simply put, leasing a car is the equivalent of renting a car; similar to renting an apartment versus buying a home. Although renting is cheaper than buying a home from month to month, you don’t build equity when renting—and the same goes for leasing a car.
Monthly leasing payments are usually lower than car loan payments because a car lease payment doesn’t go toward ownership.
However, car leasing allows you to drive a new car that might not be affordable otherwise.
What is leasing, and how does it work?
Leasing a car means you are renting it from the dealership for a specific timespan—usually three or four years — instead of paying for the car outright or financing it through a lender.
According to Experian in October 2019, the average car payment is $550 for a new car and $391 for a used car. on a leased new car is $461. In its 2019 State of the Automotive Finance Market report, average lease payments are about $100 less than car payments for both new and used vehicles, though the industry indicates an increase overall in lease costs.
Generally, car lease payments are lower than loan payments because monthly payments for leased cars only cover depreciation and rental fees and do not count towards your eventual ownership of the car.
When your car lease term expires, you’ll give the car back to the dealership unless you want to buy it. In this case, you will then be expected to pay the full price for the residual value of the vehicle.
Lease payments depend on the car’s sale price, the lease length, taxes and more. Here are a few important terms to know when leasing a vehicle:
- Residual value – A car’s residual value is the amount it’s worth at the end of the lease. This includes depreciation against the car’s original value. At the end of the lease, you’ll have the option to purchase the car at its residual value.
- Expected mileage – A car lease restricts the number of miles you can drive every year. While the mileage restrictions may vary by lessors, there is an option to pay a higher premium for higher-mileage limits. Going over the annual mileage stated in the lease will cost extra for every mile driven.
- Capitalized cost – This is the amount being financed in the car lease, and it will directly affect the lease payments. The capitalized cost largely depends on the vehicle’s price, the acquisition fee and sales tax.
- Acquisition fee – This is an upfront cost you’ll pay to lease the vehicle. It’s a service fee commonly charged by the lease finance company.
What’s the difference between leasing and buying a car?
The main difference between leasing vs buying a car is ownership. Car loans exclusively lead to ownership of the vehicle, whereas for a lease, owning the car is an optional choice made at the end of the lease term.
Because lease payments don’t build equity, if you choose to purchase the vehicle at the end of your lease term, you will pay for the residual value.
On the other hand, leasing allows people to drive new cars for a significantly lower cost than the purchase price.
Here are a few pros and cons to buying a car instead of leasing:
- Buying a car is cheaper in the long run if your goal is to acquire a car since payments made on a loan go towards the total cost of the vehicle.
- Car ownership allows you to increase your personal financial assets. If you own the car, you can sell it when it gets old. Over the term of a car lease, you are paying for the car’s depreciation and fees to the dealership.
- If you own the car, there are no mileage restrictions that would limit your driving.
- Buying a car is more expensive month-to-month. Because the leasing payment doesn’t go towards the car’s equity, it’s usually a lower monthly rate than a car loan.
- If you own the car, you’re on the hook for all maintenance issues, which can add up fast. Many car leases include maintenance, so the driver doesn’t have to be responsible for it.
- New cars lose value fast. If the car is expensive, brand new, or the car loan term is long, then it could lose value faster than you can pay off the loan. With a lease, you have the opportunity to drive a new vehicle without losing value on the car itself.
Here are a few pros and cons to leasing a car:
- Monthly lease payments are lower than monthly car loan payments. This allows people to drive newer and nicer cars that they could otherwise not afford.
- A leased car’s residual value is decided at the beginning of the lease, so you don’t have to worry about the market fluctuations or depreciation. Even if you decide to buy the car after the lease, the residual value is already set.
- Business owners could receive a significant tax break for leased vehicles. Check local tax laws to see how much you could save as a business owner with a leased vehicle.
- Car leases come with an annual mileage allowance. Many leases cap driving at 10,000 miles per year. If you drive over the annual mileage stated in the lease, then you’ll be charged for each additional mile.
- Customizing leased vehicles is generally prohibited. Any substantial changes made to the body or interior will need to be reversed before the lease is up. The dealership wants the car back in the same shape it was when leased, plus normal wear and tear.
- Cancelling a lease before it’s finished is usually expensive. Dealerships add on expensive cancellation fees and charges that can add up to thousands of dollars. Due to the high cost of cancellation, it’s usually best to complete the lease term.
How do you lease a car?
The first step in leasing a car is finding what’s available in the area. Check with a few different dealerships to see what’s offered.
Decide on the car you want to lease and test drive it. If it fits your needs, then it’s time to talk to the dealer about leasing terms.
It’s important to remember that car leases are negotiable. You can bargain to get the best deal available.
When signing a car lease, you’ll need to make a down payment. The higher the down payment, the lower the monthly leasing payment will be.
Don’t forget to make monthly payments on time. Just like any other lease, late fees apply.
What insurance do you need to lease a car?
Leasing a car always requires auto insurance. How much insurance is needed will depend on the state in which the car is located for the lease.
Liability insurance is the minimum in most states and will almost always be required for leasing a car.
Some dealerships have their own policy on what insurance is needed for a lease. Aside from liability coverage, collision and comprehensive coverage may also be required by the dealership.
Leasing a car is cheaper month-to-month than buying, but it’s more expensive in the long term if you want to purchase the car.
- Monthly lease payments are generally lower than monthly car loan payments
- At the end of the lease, you’ll have no equity in the car
- Car loan payments are higher, but they apply towards ownership of the car
Leasing a car is a great option for anyone who wants to drive a new, luxury vehicle at an affordable monthly rate. However, because lease payments don’t go toward ownership, buying a car is the better financial move over the long term if you seek to own the car.