Paying cash or taking out a car loan isn’t the only way to get into a new car. Leasing was once reserved for corporate customers and luxury car buyers, but now it’s found in every segment of the car industry, from college grads leasing subcompacts to families leasing full-size SUVs. As vehicle prices continue to climb, so does the number of people who lease. Leasing now accounts for nearly one-third of vehicle sales.
While many people take out a car loan to finance a car, leasing offers another way to have a new car in your driveway. Leasing can allow buyers to acquire a more expensive vehicle than they might otherwise be able to afford. However, it isn't without its drawbacks. Buying could be the better choice in the long run, depending on your financial situation and how you use your car.
What is the difference between financing and leasing a new car?
In some ways, leasing is just like taking out a loan. When you lease, you borrow the entire value of the car (minus any trade-in or down payment). For example, when you drive away in a $36,000 leased vehicle, you are immediately tying up the entire $36,000 that the finance company gave the dealership, the same as if you had bought the car with a loan. And just as with a loan, you’ll be charged monthly interest on that amount, minus whatever you pay back along the way.
When you are purchasing a car, the loan value is based on the entire cost of the vehicle, minus your down payment and trade-in value. When leasing, however, you are only financing the depreciation that occurs during the lease term (most commonly three years), plus fees so monthly payments tend to be lower. However in exchange for those lower monthly payments that come with a lease, you pay significantly higher finance charges compared to an equivalent loan. At the end of the lease term, you simply return the car to the dealership.
So which option is right for you? Take a look at the following pros and cons for each:
- You have lower monthly payments with a low or no down payment.
- You can drive a better car for less money.
- You have lower repair costs because you are under the vehicle's included factory warranty.
- You can more easily transition to a new car every two or three years.
- You do not have trade-in hassles at the end of the lease.
- You pay less sales tax.
- You do not own the car at the end of the lease (although there is always the option to buy).
- Your mileage is typically limited to 12,000 miles a year (you can purchase extra).
- You may find lease contracts confusing and filled with unfamiliar terminology.
- You'll pay more in the long run for a leased car than you will if you buy a car and keep it for years.
- You could face excessive wear-and-tear charges. These can be a nasty surprise at the end of the lease.
- You will find it costly to terminate a lease early if your driving needs change.
- You can modify your car as you please.
- You will save money over the long term if you buy a car.
- You can drive as much as you like. There is no excess mileage penalty.
- You have more flexibility since you can sell the car whenever you want.
- You can use the car as a trade-in on the next car you buy.
- You have to pay a higher down payment to avoid being underwater (owing more than the car is worth).
- Your monthly car payments are higher than lease payments.
- You are responsible for repair costs once the warranty expires.
- You face possible trade-in or selling hassles when you decide to get your next car.
- You will have more of your cash tied up in a car, which depreciates in value.
Still not sure? Check out the lease vs. buy calculator on our website to run the numbers yourself! Financial Calculators Here
Presented by Carl Holubowich, CFP®