Introduction

The decision to buy or lease a car comes down to your budget, lifestyle, and long-term financial goals. Understanding the advantages and disadvantages of both options can help you determine which one is the better choice for you.

Leasing vs. Buying a Car

Understanding the differences between buying and leasing a car can help you get an idea of what your experience will be like with each option. Here’s a quick summary of what to expect:

• Vehicle types: You can buy a new or used car, but if you’re planning to lease, new cars are generally the only option.
• Down payment: Leasing usually requires a smaller down payment than buying.
• Monthly payment: Lease payments tend to be lower than auto loan payments because you’re only paying for the depreciation plus other charges, rather than the full cost of the vehicle.
• Ongoing costs: Because leased vehicles are typically newer, they tend to have lower maintenance and repair costs than used vehicles and new vehicles you plan to keep for several years.
• Terms: With an auto loan, repayment terms typically range from one to seven years, while leases are typically for two to four years.
• Equity: If you own a car, you can build equity as you pay down the loan. Because you don’t own a lease, your monthly payments won’t build equity in the vehicle.
• Mileage and use restrictions: Lease companies typically set limits on how many miles you can drive per year and what you can do with the vehicle. When you buy a car, however, those restrictions don’t exist.
• Credit requirements: While auto loans are available to consumers across the credit spectrum, your options may be more limited if your credit needs some work. Leases may be even more difficult to qualify for with poor credit.

Pros and Cons of Leasing a Car

Pros

• Certain costs are lower: When you lease a car, you’re essentially just covering the cost of depreciation. Your monthly payment is based on the difference between what the car’s value is when you lease it and the residual value—what the dealer projects the car will be worth when you bring it back at the end of the lease. You can also expect a lower down payment requirement and fewer maintenance and repair costs with a lease.
• New car experience: With most leases running two to four years, you’ll always be driving a brand new or nearly new car. Leasing also gives drivers the chance to get a bigger or more deluxe vehicle than they could afford if they were buying it outright.
• Less hassle: The end-of-lease process tends to be less complicated than if you were to have to sell a vehicle you no longer want. You don’t have to worry about getting the vehicle ready for viewing, vet buyers, negotiate a price or deal with transferring the title. Once your lease is over, the dealership will take care of the process. However, you will have the option to buy the vehicle if you prefer.

Cons

• Lack of ownership: Leasing a car means that you’re always beholden to the terms of your lease agreement. Car leases typically restrict how many miles you can drive each year—charging a fee per mile if you exceed the threshold—and you can’t modify the vehicle for any reason. And with few exceptions, leases typically don’t build positive equity you can put toward another vehicle in the future.
• More expensive in the long run: If you buy a car and pay off the loan, you can keep it as long as it runs without another monthly payment. If you decide to lease all your vehicles, though, you may end up paying more in the long term because you’ll always have a monthly payment. You may also be on the hook for end-of-lease costs like mileage surcharges or excessive wear and tear penalties.
• Complicated terms: Lease agreements have a lot of fine print that can be difficult to understand. If you don’t want to live by a complex set of rules every time you drive, it may be better to buy.

Pros and Cons of Buying a Car

Pros

• Car ownership: Even while the lender holds the title, you can do just about anything you want with your car, including making modifications and driving as many miles as you want. Typically the only requirement you’ll see from a lender is a minimum amount of auto insurance coverage.
• Cash for the next car: If you get tired of your car after a while and have positive equity, you’ll have some cash left over from the sale that you can use to make a down payment on the next one, potentially saving you money.
• Potential for more long-term savings: Once you pay off a loan on a car you’ve purchased, you own the car outright and your only expenses include maintenance and repairs—assuming you don’t replace it with a new car and auto loan. You also don’t have to worry about end-of-lease costs.

Cons

• Higher upfront costs: When buying a car, you will likely need to put down more money than you would with a lease, which can impact your other savings goals.
• Higher monthly payments and repair costs: Auto loans are typically more expensive in the short term due to higher monthly payments. Also, if you plan to keep the car longer than a few years, you’ll likely pay more over time for maintenance and repairs, especially after the manufacturer’s warranty runs out.
• Depreciation: Whether you buy a new or used car, its value will depreciate over time. If the car loses value faster than you pay down the loan, you may end up with negative equity. If this happens and the car gets totaled, you’ll need to make a lump-sum payment to the lender to cover the shortfall.

Is It Cheaper to Buy or Lease a Car?

In the short term, it’s generally cheaper to lease a car due to less stringent down payment requirements, lower monthly payments, and minimal maintenance and repair costs.

In the long run, however, you may be able to save more by buying a car because you’ll retain all the equity you build as you pay down the loan. If you keep the car after you pay off the debt, you’ll no longer have a monthly payment to worry about.

That said, the cheaper option for you ultimately depends on how often you swap cars. To get an estimate of costs for your situation, consider using an online lease vs. buy calculator.

Should You Lease or Buy a Car?

Neither option is inherently better than the other, so it’s important to know your situation and goals to determine which route to take. Here are some questions to consider:

• How’s your credit? Leasing can be more difficult than buying if your credit needs some work. In both cases, however, you’ll qualify for the best terms with a credit score of 700 or higher.
• What’s your budget? If you can’t afford to buy a new car, leasing could be a cheaper alternative. But if your budget is extremely tight, you may be better off buying a less expensive used car.
• What’s your lifestyle? Some people simply prefer to drive newer cars, and if you don’t want the hassle of selling a car every few years, leasing can allow you to stay on the cutting edge of new models and innovations. But if you prefer to drive less expensive used cars or buy a new one and drive it until the wheels fall off, buying would be better.
• How do you plan to use the vehicle? If you drive more than 12,000 to 15,000 miles each year, you may run into mileage surcharges with a lease. Taking good care of your car is important when you buy—a well-maintained vehicle is worth more when you’re ready to sell—but may be even more crucial when leasing to avoid fees for excessive wear and tear.

Conclusion

Regardless of how you decide to acquire your next car, know what your credit looks like before you start the process. You can check your credit score for free with Experian and get a high-level look at which factors are influencing your score.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is ready to assist you with all your mortgage requirements.