Leasing vs. Buying a Car: Which Option is Best for You?
Should you lease or buy your next car? Leasing costs less on a monthly basis and puts limits on how you can use your car. Buying comes with ownership responsibility but will cost you less in the long run.
From how you drive to auto maintenance, there’s a lot to consider before you decide which way to go. So, we’re breaking down everything you need to know to make the best choice for you.
Leasing vs. Buying a Car at a Glance
Here’s a quick overview of the key factors involved in leasing versus buying a car:
|Ownership||Full ownership after loan is repaid||No ownership or equity earned at lease end|
|Upfront costs||Down payment, sales tax, registration, dealership fees, lending fees||First month's payment, security deposit, acquisition fee, disposition fee, registration, potential taxes|
|Monthly payments||Bigger ongoing payments, but payments end when loan is paid off||Smaller ongoing payments, but payments continue as long as you have the car|
|Insurance||Standard auto insurance. GAP insurance may be required during term of loan only||Standard auto insurance and GAP insurance are required during entire lease term|
|Warranty||May cover the car for the first few years of ownership||Typically covers the car for the duration of the lease|
|Maintenance and repairs||Your responsibility. Costs increase when warranty ends and as car ages||Lower cost. Car is protected by warranty, and lease covers normal wear and tear|
|Flexibility||Higher: Freedom to customize car or use it for any purpose||Lower: Mileage caps and potential restrictions on usage|
10 Important Factors to Consider When Leasing or Buying a Car
The terms of a car purchase and lease can vary dramatically. Before you head to the dealership, consider these 10 factors:
1. Upfront costs
To get that new car, you’ll need to pony up some cash. What you’ll pay depends on your choice to buy or lease.
If you lease, you’ll need to put down a security deposit roughly the cost of one monthly payment, rounded up to the next $50. You’ll also pay some upfront fees. Expect an acquisition fee for setting up the lease, a disposition fee to clean and sell the car when your lease ends, and the cost to register your car.
When you buy, you’ll likely need to make a down payment upfront. You’ll also need to cover sales tax, registration costs, and origination fees charged by the lender to set up the loan.
2. Monthly payment
Monthly payments on a lease will almost always be less than those for a car loan.
At the same time, when comparing leasing vs buying a car, you might not necessarily pay less overall to lease. If you lease, you’ll pay a flat monthly payment until you return the car. If you buy, you’ll pay monthly until your loan balance hits zero. Then your monthly payment disappears.
As a result, owning a car tends to be less expensive as years go by. Hold on to the car for as long as possible to maximize the value of your money. After you pay off the loan, you can keep a well-maintained car for years without needing to make a loan or leasing payment.
3. How you'll use your car
Are you someone who wants a new car every few years? Do you need a swanky car to impress business clients? A lease could be more appealing for you. (And a car leased for business might just get you a sweet tax deduction as well.)*
But buying works better if you need some extra flexibility. If you drive long distances, you’ll want to avoid the mileage caps (and costs) built into standard leases. Most leases limit you to 12,000 miles a year with added miles costing you $0.15 to $0.30 per mile.
Adding extra miles at the start of your lease will add to your upfront costs—not your monthly payments. And going over your mileage cap will cost you in fees when your lease is up. So, returning your car could mean an unpleasant, surprise bill for you.
Many leases also restrict your ability to drive to other countries or use your car as a rideshare driver.
In most cases, when you lease a car, it’ll be covered by warranty for the entire lease term. So, as long as you lease, you can rely on that warranty.
When you buy a car, you might have a warranty for the first few years you own, but that warranty term eventually expires. Or you may purchase a car with a limited warranty or no warranty at all. That distinction has a big impact when it comes to the cost of repairs.
5. Maintenance and repairs
Whether you own or lease, you’ll need to cover the cost of maintenance and damage beyond regular wear and tear.
If you buy, you’ll also need to pay for repairs when your warranty expires. And your maintenance costs may go up over time as your car ages. So, over time, you may be able to eliminate loan payments as a line item in your budget . . . but you’ll still need to budget for increasing maintenance and repair costs.
> ProTip: How much will it cost to maintain your new car? Try out Edmund’s True Cost to Own® calculator.
You’ll have to purchase auto insurance whether you lease or buy, but those who lease might wind up paying more. Standard lease agreements generally require you to carry, Guaranteed Asset Protection (GAP) insurance on top of your regular coverage.
GAP insurance protects the leasing company as your leased car depreciates in value. If your car is totaled, the GAP coverage will pay the difference between what the car is worth and how much you still owe on your lease.
7. Your credit
Before you decide to buy or lease, take a look at your credit score. Typically, you’ll need good or excellent credit to sign a lease agreement. And great credit will also get you the best terms on a car loan.
But loans are still an option even if your credit needs some work. When buying, you always have the choice to pay in cash or trade in an old car to offset the cost. And you can also look into refinancing your auto loan once you have made at least one payment.
8. Your exit strategy
At some point down the road, you and your car will part ways. But how flexible are you with the end of your relationship?
If you own your car, you’re free to sell at any time. You’ll need to pay off any remaining balance on your loan, but you’ll pocket the leftover cash yourself. Spend it on a new car if you want or use it to cover an unanticipated expense.
But what if you need to bail out of your lease before it’s through? You’ll likely face some costly termination fees—sometimes more than what you’d owe to run out the lease naturally. Review any contract before you sign.
9. Ownership and equity
When your lease ends, wrapping things up can be as simple as returning the car and walking away. But you’re walking away from all the cash you’ve spent on the lease as well. Sure, you can choose to buy the car when your lease term ends. But you’ll need to pay the full value of the car at that time.
When you buy a car instead, you’re paying for ownership. The money you put down and the principal part of each loan payment goes directly toward equity. When you want to unload your car, you’ll sell it or trade it in. And you’ll pocket the equity you’ve earned on that vehicle.
Ownership builds equity. But owning your car goes hand in hand with depreciation. Make no mistake: Unless you’re buying a collector vehicle, your car will decrease in value over time.
If you buy a brand-new car, you’ll take the biggest hit—your car’s value will plummet 20 to 30% after just the first year. After that, the rate of depreciation reduces. Used cars also see depreciation, but the drop may not be so dramatic.
If you’re leasing, however, depreciation is only a concern for the leasing company. You’ve got no ownership stake in the car. You don’t need to worry about how much money the car will command when it’s eventually sold.
Buying vs. Leasing a Car: Pros and Cons
Should you buy or lease your next vehicle? It depends on your lifestyle, your finances, and your goals. When making your choice, consider the pros and cons of each:
Who Should Buy a Car?
If you want the most control over your car, ownership is the way to go. You’re free to drive it as much as you want, take a road trip to another country, or paint the whole car in neon stripes—it’s yours to do what you will. Plus, it’s the smart money move if you plan to keep your car for many years. Be ready though to cover maintenance and repair costs, particularly when your warranty ends.
Who Should Lease a Car?
Do you want the thrill of the new car experience every few years? Want to avoid shouldering the costs of repairs or maintenance for an aging car? Then take a good look at leasing. You’ll keep your monthly payments low while enjoying the benefit of a never-ending warranty. Just be sure your lease terms don’t limit or penalize you for the way you plan to use your car.
Who Pays More?
In the long run, car buyers pay less than those who lease over the long term. When you lease regularly (over many years), you always owe a monthly payment on an asset you never own. But when you buy a car and maintain it well, that car will cost less than a lease over several years. Your loan payments will eventually stop, and you’ll own an asset.
LendingClub Can Help Lower Your Rate on an Existing Car Loan
Leasing or buying a car—it’s a decision that only you can make for yourself. Which benefits, costs, and guarantees matter most to you when you’re shopping for a vehicle? What makes the most financial sense for your family? No matter what you choose, knowing the pros and cons means you can make your next move with confidence.
Want to get a better rate on your current auto loan? See what you qualify for by checking your rate through LendingClub, today.
* LendingClub does not provide, nor intends this information to be considered tax, financial, or legal advice. If you have questions, we recommend you talk to your financial or tax advisor.
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