When you're looking at leasing vs. buying a car, the one key factor that should drive your decision is money: how much you have and how much you want to spend. Here, we'll offer insights into leasing vs. buying a car that will help steer you in the right direction.
Lease or buy a car: Factors to consider
As you'd expect, there are a number of pros and cons in leasing vs. buying a car. "It's important to realize your unique situation before settling on one or the other," says Korey Adekoya, an analyst at Shabana Motors, a used-car dealer in Houston.
What follows are some questions you can ask to figure out your unique situation.
What's your financial situation?
This question revolves around how much money you can afford every month for a car. On a monthly basis, a lease tends to be cheaper than a car loan, so if you're worried about your budget, the leasing option might be more attractive.
To help you along, we did some quick math. A number of lease vs. buy calculators are available online. Using one of them, we computed the monthly loan and lease payments for the most basic new 2017 Corolla on the market.
Our scenario assumes a vehicle price of $17,000, a $1,000 down payment, a 6 percent sales tax rate, a 4 percent interest rate (APR), a loan term of 60 months and a lease term 36 months. (Automotive website Edmunds.com recommends a car lease of 36 months or less.)
Under our scenario, the monthly loan payment for the Toyota Corolla was $313 a month. For the lease, it was $280 a month.
Keep in mind that this scenario is just an example, and your experience may or may not be similar.
On average, leasing a new car costs $92 less per month compared with financing a car with a loan, according to 2017 data from credit-reporting bureau Experian.
That's not the only number you should look at, though. Automotive website KBB.com says many car shoppers "practically ignore" the total amount that'll be paid over the life of a lease or loan. "Instead, they are concerned almost exclusively with the monthly payment, trying to make it as low as possible," KBB.com says.
In ignoring the total amount, you'll be overlooking whether leasing vs. buying a car will wind up costing you more over time.
How much money do you have for a down payment?
In some cases, you can secure a car loan without a down payment. However, that privilege typically is reserved for someone with a solid credit history. In the first quarter of 2017, according to Experian, the average credit score for someone taking out a loan for a new car was 714; it was 722 for a new-car lease.
If your credit score isn't so great, you'll likely need to come up with a down payment for a car loan. The good thing about that is you'll end up with a lower monthly payment and lower overall costs.
A car lease doesn't require a down payment. In fact, experts usually discourage making a down payment when you're leasing.
Why is that? Automotive website CarsDirect.com says that if you crash the car during the first few months of the lease and the car is totaled, you'll lose the down payment, even if you have insurance. Plus, according to the website, leasing a car can help improve your cash flow, but forking over money for a down payment will diminish that benefit.
Rob Drury, executive director of the Association of Christian Financial Advisors, points out that it used to be difficult to lease a car without reasonably good credit. Today, however, someone with a credit score below 600 can get a lease.
By the way, if your leased car is totaled or stolen, most leases do include gap insurance — filling the "gap" (except for that down payment) between what's owed on the car and what the car's actual cash value is.
How much do you drive?
If you have a long workday commute or you love to go on long road trips, a lease probably isn't a good option for you, says Matt Smith, editor of car-buying website CarGurus.com.
Why? Because a lease places a yearly limit on how many miles you can put on the car. Most standard leases allow a maximum of 15,000 miles a year, says Trey Schmidt, president of Calloway Auto Buying, a car-buying service. You could owe mileage penalties — usually 20 cents to 25 cents per mile — if you go over the annual limit, he says.
If you own the car, you can put as many miles as you want on the odometer. But, of course, you've also got to maintain the car if you want to ensure it goes the distance. And you're stuck with those maintenance costs for as long as you own the car, although some of those costs may be covered under a warranty.
How do you take care of your car?
One noteworthy difference between a lease and a loan is that with a lease, you're financially responsible for any extra "wear and tear" beyond what's normal. As a result, you may be required to pay what are known as wear-and-tear fees. No such fees are part of a car loan.
So, if you tend to be rough on your cars, a loan probably will be preferable over a lease.
However, since leasing terms usually don't go past the expiration date for the car manufacturer's warranty, a lease "can largely alleviate maintenance concerns," Smith says.
How long do you plan to keep the car?
Are you revved up by the thought of having a new car every three years? Compared with a loan, a lease is better suited to switching cars when you're tired of the one you've been driving.
If you do decide to give up the car after a leasing period ends, you're left with nothing that you own. If you take out a loan, however, you'll own the car after the loan is paid off, and it still will hold some value in case you want to sell it or trade it in.
Schmidt warns that if you turn in the vehicle at the end of the lease and don't lease another vehicle from that company, you'll be charged a disposition fee, which typically amounts to somewhere between $400 and $500.
But, as noted by Drury, someone who leases a car normally can expect to turn in a "reasonably maintained" vehicle within the lease's mileage limits and not be hit with any extra fees.
Leasing vs. buying a car: Pros and cons
Pros for leasing
- Typically a lower monthly payment
- No down payment required
- Ability to get a new car after the lease ends
- Full warranty coverage during most leasing periods
Pros for buying
- Ownership of car after loan is paid off
- Ability to put lots of miles on car without financial penalty
- No monthly payments after loan is paid off
- Ability to sell or trade in car whenever you want
Cons for leasing
- No ownership of car after lease ends
- Financial penalties for going over mileage limit
- Little flexibility in trading in or turning in car before lease ends
Cons for buying
- Typically a higher monthly payment
- Possibility of needing a down payment
- Loss of vehicle value over time
Determining which is best for you
Leasing vs. buying is not a "one size fits all" situation. The best avenue for you to get a car might not be the best avenue for your coworker or neighbor.
One key to choosing whether to lease or buy is assessing your finances. Is having a lower monthly payment critical to you? Then leasing might be the better option. Is having a car you can call your own more important? Then buying is typically the best path.
Regardless of which route you go, remember that in the long term, buying tends to be less costly than leasing.
"Budgeting for a new car, whether buying or leasing, comes with a certain amount of necessary research in order to find the best deal for a shopper's budget," Smith says.
Another consideration: How much do you drive? If your daily commutes or your road trips are long, then buying is a smarter choice, as leases normally come with annual mileage limits. But if you don't log a lot of miles on the road (usually under 15,000 a year), leasing can be appealing.