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Leasing vs Buying a Car: Which Is Better?

Leasing vs Buying a Car: Which Is Better?

We all want to feel like we're walking away from a car transaction with the best deal possible. If you're weighing financing options for your new car, you're probably getting lots of advice from well-meaning friends and family. Some will tell you that purchasing a car is the sure bet. Others will swear by leasing. How can you know the best way to come out on top with the buying vs finance car question? It takes digging deeply into both options to find out.

Leasing a Car vs. Buying

When you lease a car you will usually negotiate payments, set a lease duration, and pay a small set of fees up front. Leasing a car is basically the same as renting an apartment; you'll agree to terms and the duration in your contract, giving you the ability to use the car for a reasonable monthly fee.

Buying a car can also involve financing or purchasing the car for the full price outright. This is one of the biggest differences between leasing and buying: when you get to the end of your lease terms, you usually won't own the car, whereas buying a car means you are the legal owner the second the documents are signed.

Leasing a Car

Leasing a car essentially means that you're "renting" a car for a fixed term. However, there are some stipulations weaved in that make this very different from picking up a ride at a local rental agency. With leasing, you'll make monthly payments to keep possession of a car through your lease term. You'll then return the car at the end of your term. Something that attracts many people to leasing is that you're typically making smaller monthly payments compared to standard car payments. This mostly has to do with the fact that you're not responsible for covering the principal the way you are when you borrow money for a car loan.

How Do Car Leasing Contracts Work?

You may be wondering how car leasing companies decide on monthly lease rates. Leasing a car means that you're actually borrowing and repaying the gap between the car's full new-car value versus the car's expected value when your lease ends. Leasing companies will also tack on some financing charges. Use GoodCar's lease calculator to figure out how much you will be paying. Leases are affected by many factors such as term, API rate, incentives, and sticker price.

Leasing prices also vary based on how many miles you expect to drive. You'll need to choose a mileage option based on the anticipated number of miles you'll drive during your term. However, the "catch" is that you'll be charged for any extra miles you tack on unless you decide to ultimately purchase the vehicle. Yes, you can buy a car after the lease ends. This is known as a lease buyout.

Financing a Car

Buying a car can be financed through either direct lending or dealership financing. The goal with both is to make monthly payments on a vehicle until owning it outright. Most people put down between 10% and 20% of a car's price before financing the rest. Loan terms generally cover 24, 36, 48, 60, 72, or 84 months.

What Is Direct Lending When Buying a Car?

With direct lending, you're getting a traditional loan from a bank, credit union, or other financial institution. Your car loan will require you to pay your financed amount with any applicable charges over a specific period of time. The perk with direct lending is that you can actually get authorized for a loan before you start shopping for your car. Showing up with knowledge about your future loan's terms, annual percentage rate (APR), repayment term, and maximum borrowing amount can empower you to focus on the right cars at the right prices. Use GoodCar's loan calculator to empower yourself.

What Is Dealership Financing When Buying a Car?

Using dealership financing means that you're applying for a car loan through the dealership where you're purchasing your car. You'll enter into a contract with the dealer that specifies a financing amount, financing charge, and repayment period. While you're negotiating directly with the dealer, it's very likely that your contract will be sold to a bank or credit union that will be collecting your monthly payments.

Going with dealership financing doesn't necessarily mean being stuck with limited options. Dealerships often offer several financing options to buyers because they have partnerships with different lending institutions. You may even be able to tap into limited-time manufacturer offers for low interest rates and special incentives.

Leasing vs Buying a Car: Pros and Cons

You may be wondering how car leasing companies decide on monthly lease rates. Leasing a car means that you're actually borrowing and repaying the gap between the car's full new-car value versus the car's expected value when your lease ends. Leasing companies will also tack on some financing charges. Use GoodCar's lease calculator to figure out how much you will be paying. Leases are affected by many factors such as term, API rate, incentives, and sticker price.

Pros of Leasing a Car:

Pros of Leasing a Car:
  • Better for Those on a Budget: If you are on a fixed income or don't tend to have much leftover outside the necessities, leasing can offer to keep recurring costs at a much more reasonable level. Monthly lease payments are almost always lower than monthly car payments and can be much more gentle on those trying to stick to a specific budget. Use GoodCar's Lease Calculator to get an estimate of a fair lease deal on the car you are interested in leasing. Keep in mind that the lease price can be affected by minor factors like API rate, incentives, and the vehicle sticker price.
  • Better Initial Protection: More often than not a lease will include a manufacturer's warranty, which can help cover the bills in the event your vehicle necessitates large repairs. These warranties can also cover basic vehicle maintenance like oil changes; check your contract and speak with your car dealer to see what warranty options they offer.
  • Avoid a Giant Down Payment: Purchasing a car often comes with a big case of sticker shock. While leasing usually comes with a small set of fees, buying a car will almost always involve a significant percentage paid before the vehicle leaves the lot. These down payments can be as high as 20% or more; overall, a lease can be a way for those with a bit less cash upfront to get the car they desire.
  • Access to Higher-end Vehicles: Because payments for a leased car are lower, you can often drive vehicles that would be outside your buying power. Financing the total cost of a high-end car can put immense strain on your wallet, but with a lease, you only get to use the vehicle for a set number of months. Even if you lease-to-own, changes in the car market could make your car more affordable than it was at singing.
  • Try Out Different Rides: If you are someone who doesn't like to be tied down by one kind of car for too long, car leases can offer you the ability to try out a new vehicle without any hassle. Most lease terms last between 24 and 48 months, and once they're done you don't need to worry about reselling the car; just pick a different car, sign a new lease, and drive away with your new ride.

Cons of Leasing a Car:

  • Those Small Fees Can Add Up: Depending on the terms you negotiate in your lease contract, you could easily end up paying a number of excess fees for easily made mistakes. For example, if your lease has a "wear-and-tear" clause that requires the car be returned according to a certain standard. An unscrupulous dealer could take advantage of something as small as a crack in the window to take a few more dollars out of your pocket.
  • The Vehicle Isn't Really Yours: Unfortunately, the nature of a lease means that you have no real equity in the car. While you are renting the vehicle you have the right to drive it, but once your lease terms end, the car goes back to the dealership. Some leases will give you the option to buy the car out after your terms have expired (which can be advantageous in an elevated vehicle market.) But if there is no buyout clause in your contract, you'll need to find a new form of transportation in a couple short years.
  • Routine Service Is Often Required: Be sure to check your lease contract for anything regarding routine service, as many dealerships will require you to upkeep the car based on certain criteria. Hopefully the cost of routine service is included in your terms; if it isn't, you may find yourself paying hundreds of extra dollars to cover small maintenance like:
    • Changing the oil filter
    • Replacing the headlights, turn signals, and brake lights
    • Rotating the tires
    • Getting oil changes
    • Maintaining coolant levels
    • Keeping tires within a certain tread depth
  • Annoying Mileage Restrictions: To try to keep vehicle's in the best condition possible many dealerships will tack on mileage restrictions to your lease terms. These terms are up for negotiation, and many lesser's will be open to trading higher monthly payments for a higher mileage limit. Be careful though! Dealerships will usually charge a fee if this limit is exceeded, further increasing your overall costs.

Pros of Buying a Car:

  • You Own the Vehicle: This may seem obvious, but one of the best things about car ownership is…car ownership! With a lease, the end of your terms is always on your mind; eventually, a car (that you may have come to love) will have to make its way back to the lot. By buying your car you ensure that the vehicle is yours until you sell it or it ceases to function.
  • Drive to Your Heart's Content: If you purchase a car, there is no way for a dealership to limit your mileage. That means whether you want to drive 100 miles a year or 100,000, there are no extra fees hovering over your head.
  • You Can Sell It: A bought car is your property, meaning that if the time comes where you grow tired of the vehicle, you are welcome to sell it. With fluctuating car markets, it's even possible that your vehicle is worth more than you paid for it. Selling a car for a profit, even small, is something you simply can't do when leasing a vehicle.
  • No Required Maintenance: Because there are no lease terms binding you to a certain car-owning behavior, you won't need to worry about keeping your vehicle up to certain standards. While everyone should engage in proper car maintenance, life gets busy; if you forget to get an oil change, should you really have to pay a fee? With buying a car, there is no one to nag you pay for being a bit forgetful.

Cons of Buying a Car:

Cons of Buying a Car:
  • That Sticker Shock: Sometimes it's required and sometimes it isn't, but no matter what form it comes in a down payment can be a significant chunk of money. If a dealership requires a down payment, you can find yourself paying as much as a fifth of the vehicle cost before it even leaves the lot. Even if you don't make a down payment, that cost doesn't just disappear. The cost will just be rolled into even larger monthly payments.
  • A Strain On the Monthly Budget: speaking of larger payments, there's another advantage of leasing over buying: it lowers your monthly expenses. Making payments on a car you intend to own almost always involves a much higher cost than leasing. Yes, you get to own the car at the end, but that doesn't make those monthly bills any easier to stomach.
  • Maintenance Still Required: Just because there isn't a lease forcing you to maintain your car, doesn't mean you won't be forking out some dough. For your vehicle to remain in proper working order, you will need to maintain and repair it when necessary. You may not have to meet the criteria set by a lease agreement, but you'll definitely still be taking the car into the shop every once and a while.
  • Risk of Getting Scammed: Buying a car, especially a used car, can open you up to a wide variety of scams. Odometer rollback, buying a "lemon", title washing; all of these and more can occur if you aren't careful. Leasing a car almost always takes place through a dealership, giving the transaction a bit more legitimacy.

Frequently Asked Questions

Can You Buy a Car After You Lease It?

Yes. This is called a lease buyout. Leasing companies will allow you to either finance or pay cash for your car if you want to keep it. However, it can be hard to get a good deal using this option because a leased car's purchase price is based on the gap between new-car value and residual value.

Is It Cheaper to Buy or Lease?

Monthly lease payments tend to be lower than monthly car payments. However, fees and penalties can actually make a lease much more expensive in some situations.

What Happens If You Drive Your Lease Too Many Miles?

If you go over the miles in your lease contract, you will be charged for every mile you go past your limit.

Do You Pay for Maintenance on a Leased Car?

Many people are surprised to learn that it's common to pay some maintenance and repair costs on leased cars. However, most leased cars are newer cars still covered by a manufacturer's warranty. Many lease agreements also throw in oil changes. That doesn't mean that you won't ever be on the hook for replacement parts and repairs.

Is Leasing a Better Deal Than Buying?

Yes, leasing can be a better deal than buying, but it depends on several factors:

  • Your Budget
  • What Type Of Vehicle You Are Looking For
  • The Length of Time You Plan to Use the Vehicle

Everyone's situation is different, and while leasing can offer lower monthly payments, you will need to find another vehicle after your lease terms have expired.

Is Now a Good Time to Lease a Car?

It's always best to check the current car market conditions before leasing or buying a vehicle. External factors like chip shortages or inflation can cause lease prices to skyrocket, creating a situation where finding a decent car can be a massive hassle. If you already have a lease during these types of conditions, you can often make a profit at the end when the vehicle is returned to the dealership. But if the market is too hot, starting a new lease is generally not a good idea.

Are There Tax Benefits to Leasing a Car vs. Buying?

If you buy a vehicle outright you pay all associated taxes up-front, while a lease would involve paying tax each month with your regular payments. Any type of tax paid on your vehicle can be deducted if your car is used for business. If you do use your bought or leased car for work, you can deduct maintenance, repairs, gas, depreciation, insurance payments, and certain fees during tax season.

What Should I Do Before Buying or Leasing a Car?

If you plan to buy or lease a vehicle, you'll want to do as much research as possible. Make sure to get a vehicle history report on any car you are considering for purchase or finance. These reports can give you essential details like:

  • Title Records
  • Junk/Salvage Records
  • Insurer "Total Loss" Records
  • Pricing
  • Sales History
  • Problem Checks
  • Auto Specs
  • Location History
  • NHTSA Crash Test Ratings
  • NHTSA Recalls
  • Awards and Accolades
  • Manufacturer Information