Leasing Vs. Buying A Car: Pros And Cons

4-Minute ReadNovember 12, 2021

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Most people will agree that when shopping around for a new car, you want to get as much as you can for as little as possible. The best way to pay for it, however, largely depends on your priorities. Read on to learn the benefits and drawbacks of leasing vs buying a car, so you're better equipped to get the best deal for you.

What’s The Difference Between Leasing And Financing A Car?

When you buy a house, the house is yours when it's paid off, and it's the same with financing a car. When you lease a car, however, you have to give it back when the terms are up and pay for the wear and tear – much like an apartment rental. At that point you would have to sign a new lease for the use of another vehicle or buy it.

When you lease a car, the monthly payments cover the car's expected depreciation, the dealer's rental fee and other costs. With an auto loan, your money goes toward repaying the lender for the cost of the vehicle plus whatever interest they charge. Depending on your credit score and other qualifying factors, it could be easier to qualify for an auto loan than a lease.

Pros And Cons Of Leasing A Car

Leases appeal to drivers who want a lower monthly payment, the latest automotive technology, and stress-free maintenance. According to the Bureau of Transportation Statistics, the number of new vehicle leases grew by 78.9% between 2010 and 2020. In 2021, around one in four vehicles on the road are leased.

Pros

Low maintenance: Newer vehicles don't break down very often. In addition to the manufacturer's warranty, many dealers offer maintenance packages covering services such as fluid changes and brake repairs. 

Latest design and technology: If you choose the standard 3-year lease term, you can always have a vehicle with cutting-edge design and the latest features and technology.

Lower payments: New-car leases usually have lower payments and monthly costs than new-car loans because you're only paying the expected depreciation over the term of the lease and don’t ever own the vehicle.

Simple end-of-lease process: When your lease has ends you only need to return the vehicle to the dealership. Assuming the car's condition is acceptable and you're within your mileage limit, you should be on your way in minutes.

Cons

Long-term cost: Leasing is more expensive than buying over the long term, because you have to return the car when the lease is completed. With financing, you have to pay the loan’s principal and interest, but you’re also building equity – you keep the car once the loan is paid off.

Limited mileage: Leases have mileage limits. If you go over the limit, you'll potentially owe the dealer a lot of money at the end of the lease. High-mileage leases are an option at an extra cost. You should review your contract to determine how much you can expect to pay for each extra mile. Take inventory of your miles per month and consider any anticipated changes to your driving habits before agreeing to a lease.

Lapse in maintenance coverage: Damages beyond normal wear and tear, vandalism and missing or stolen parts usually aren't covered by a lease's maintenance package.

Less federal regulation: While lessors do need to disclose what constitutes excessive “wear and tear,” there is no federal law that caps the amount you’d have to pay for repairs. Depending on which state you live in, you may need to pay for repairs in full.

Pros And Cons Of Financing A Car

Financing a car instead of leasing can be a better option for drivers who prefer to keep a vehicle for  longer than a typical 3-year leasing contract. If you choose to finance a car, you’d be in good company. As of 2021, there were over 112 million auto loans in the United States, according to the Federal Reserve Bank of New York's Center for Microeconomic Data.

Pros

Ownership: After your auto loan is paid off, you own the car and its residual value. You will likely be able to drive the car for several years with no monthly payment. In fact, because of improved quality, Americans keep their cars for an average of 12 years.

Freedom to sell: You can sell a car that you own whenever you please, even if you still have a loan on it. That means, if you find yourself in a financial pinch, you can leverage your equity and make money, rather than pay fees to break a leasing contract.

Unlimited mileage: You can drive the car as much and as far as you like, without extra charges. In fact, the cost per mile of leased cars is usually much higher than the cost per mile of driving vehicles that you own.

Customization: You can modify your car however you wish to suit your preferences.

Do your own maintenance: If you're mechanically inclined, you could save some money by performing your own maintenance.

Cons

Value fluctuation: If there are several recalls for your car (especially a major recall based on a safety issue), consumer confidence in the vehicle can be lowered and the value could fall faster than normal. Keep in mind that a few smaller recalls are typical and usually don’t affect value.

Long-term maintenance costs: According to Consumer Reports, maintenance costs are more than double for 10-year-old vs. 5-year-old vehicles. That said, the money you save with no monthly payment on older vehicles will almost always work out in your favor during those higher-maintenance years.

Resale inconveniences: Selling a used car to a private seller can be a time-consuming process if you choose to go that route. You may need to either accept less than the vehicle is worth or be comfortable negotiating with hagglers. On the other hand, trading your car in at a dealership or selling to a reputable online car dealer is a much more seamless process. Rocket AutoSM can help you get an instant cash offer for your vehicle if you’re looking to sell now.

Is It Cheaper To Lease A Car Or Buy One?

Buying your car will almost always be a smarter financial decision than leasing a car because you own the car outright once the loan is paid off, meaning you benefit from the equity you have in the car. Of course, if you have the money, paying cash is always the cheapest option when buying a vehicle because you won't have financing fees and interest.

The lower monthly payments of a lease option may sound alluring to those on a budget. Keep in mind that you’ll need to pay administrative fees when you both sign the lease (acquisition fees run $395 – $895) and return the car (disposition fees run about $350) at the end of the term.

Driving the leased car over the set annual limits (typically 12,000 miles) can rack up an additional 10 – 25 cents per mile. If you return a car that has gone over the set mileage limits even by just 5,000 miles, you could owe an additional $1,000 in over-mileage fees at a 20-cents-per-mile charge. Be sure to read your lease agreement to understand over-mileage fees, termination fees, auction fees, purchase options, documentation fees and so on.

For Example

To get a better idea of the difference in leasing vs. buying a car, compare the costs for a $30,000 vehicle over a 3-year lease term with no down payment against a 5-year auto loan. One factor that affects both calculations is that a new car loses 38.2% of its value after 3 years and 49.6% after 5 years.

Year

Cost Of Leasing

Cost Of Financing

Car Value*

1

$2,976

$6,000

$24,300

2

$5,952

$12,000

$22,300

3

$8,928

$18,000

$18,540

4

$11,904

$24,000

$16,400

5

$14,880

$30,000

$15,120

6

$17,856

$0

$13,608

7

$20,832

$0

$12,247

8

$23,808

$0

$11,022

9

$26,784

$0

$9,920

10

$29,760

$0

$8,928

*Estimates based on value from years 3 and 5.

Not accounting for additional fees, a 3-year lease payment to cover the anticipated $8,928 in depreciation would be $248 a month or $2,976 per year. With a 5-year auto loan, your monthly payment, excluding interest, would be $500 for a total of $6,000 per year.

Let’s say the lessee continues to lease brand new vehicles every 3 years. At the end of 5 years, you'll have paid $30,000 with an auto loan vs. the $14,880 you'd pay with a lease. However, with the auto loan, you now own a car that's worth about $15,120. You can either continue driving the vehicle for several years with no monthly payment or sell at any time and recoup some of the money you spent to buy the car.

In this scenario, lessees who choose to opt in to another lease term at the end of 3 years will get the keys to over three brand-new vehicles, but they’ll continue making monthly payments that add up to $29,760 over 10 years. At the end of 10 years, they haven’t paid into car ownership and don’t have any equity to sell.

The Bottom Line: Ownership Builds Equity

Leasing is the best way to get the latest cars on the market while investing minimal effort on maintenance and repairs, but the monthly payments don’t get you closer to owning a car. Financing (or buying a car), however, builds equity, despite how quickly cars can depreciate. If you keep the car long enough after paying off the loan, the savings you gain could be enough to buy another vehicle outright.

Before signing a lease or financing agreement for a car, you should clearly define your financial goals. If you only have experience leasing cars, learn as much as you can about how to buy a used car so that your decision can be based on what's right for you and your wallet.

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