The pros and cons of buying vs. leasing a car

When it's time to get a new or new-to-you car, you have two options: buy or lease. You'll find pros and cons to both options, so it's important to explore these approaches carefully. Understanding how a vehicle purchase differs from a short-term lease will help you find the best approach for your needs.

What does it mean to buy a vehicle?

Purchasing a vehicle is fairly straightforward if you can afford to pay in cash. You'll negotiate a comfortable price, pay the individual or dealership, and drive away with your new or new-to-you vehicle. If you can't afford to buy the vehicle upfront, you have the added complexity of financing the car.

To finance a vehicle, you'll need to secure a loan from a bank, credit union, or other financial institution. You still need to make a down payment on the vehicle, but you can finance the remainder and pay it back over time. It's generally best to aim for at least 20% down on a new car and 10% down on a used car.

Loan terms vary by lender, but all include interest. The higher your interest rate, the more you'll ultimately pay for the loan. Auto loans vary in length, usually falling somewhere between 24 and 96 months. Once you've paid off your loan, the car is yours to keep or sell as you'd like.

What does it mean to lease a vehicle?

When you lease a vehicle, you essentially rent it from the dealer for a set period of time. Most vehicle leases are 36 or 48 months. When the lease term is up, you can generally purchase the car from the dealer for a price determined by your lease agreement. You also have the option of returning the car. Many people choose to return their leased vehicles at the end of each term and upgrade to a newer model.

The cost for your lease will typically include the initial lease fee, a rent charge, taxes, and other fees. It's important to read the fine print on any lease agreement so you know what you'll actually pay each month. Leases come with many stipulations, including how many miles you can drive, the type of insurance you must carry, and the maintenance you're required to provide.

Benefits of buying a car

The most obvious benefit of purchasing a vehicle is that you'll own that car outright. Once you've paid off your loan, the car becomes an asset that adds to your financial net worth. Though the car will depreciate over time, you may still have the opportunity to sell it in the future to help finance your next vehicle.

As the owner of a vehicle, you can use it however you'd like. There are no limits on how far you can drive, and you can modify the car in any manner that you'd like. While wear and tear will impact the car's resale value, you don't have to worry about fees and charges if your kids spill ice cream in the back or slap a sticker on the bumper.

If you finance your vehicle, you will typically have to carry full insurance coverage. Once you've paid for the car in its entirety, the only insurance requirements are those of your state.

Drawbacks of buying a car

When you purchase a car, you're completely responsible for it, which can be a drawback in certain situations. You can't return the car as easily as you can at the end of a lease. Instead, you'll have to either trade it in or sell it yourself. If you've financed the vehicle, you need to pay it off before you can move on to another car. 

Vehicles depreciate between 10% and 20% every year, so your vehicle will never have the same value that it did when you drove it off the lot. Long-term maintenance costs are higher for a purchased vehicle as well because you'll typically keep it longer than the first three or four years of its life when it may be covered by the factory warranty. Repairs and routine maintenance become costlier as a vehicle gets older.

Benefits of leasing a car

Leased vehicles usually have lower monthly payments than those you finance. This is because you're only paying for the vehicle's depreciation. There are no upfront sales taxes for a leased vehicle, and you may enjoy tax benefits if you're leasing the car for business use.

Routine repairs on a leased vehicle are usually covered by the factory warranty. If you get into a cycle of leasing vehicles, you'll enjoy all the perks of a brand new car every three or four years.

Drawbacks of leasing a car

When you lease a car, you're expected to follow strict rules. If you don't care for your vehicle properly, you can void the factory warranty that's meant to cover your repairs. You'll face added fees at the end of your lease if you exceed the allotted mileage, modify the vehicle, or incur wear and tear.

Under a vehicle lease, you are usually required to carry full insurance coverage. This can make your insurance premiums more expensive than what you might carry on a vehicle you own.

Which option is right for me?

There is no one-size-fits-all answer when it comes to leasing vs. buying a car. It can help to ask yourself the right questions to make sure you settle on the choice that best fits your needs. Consider:

• How many miles do I drive each year? A car lease usually limits you to around 12,500 to 15,000 miles a year. If you drive more than this, a lease isn't the right option for you. Track your routine driving for a month to get a general idea of how many miles you put on your car. Also, consider whether you'll use your car on vacation road trips and how that might impact your total miles.
• Who will ride in my vehicle? If you're the only person using your vehicle or you primarily drive with other responsible adults, you may be able to keep your car in the neat condition that's required of a lease. If you travel with pets or children, however, you may want to purchase a vehicle so you don't have to worry as much about sticky hands and muddy paws.
• What do I do in my vehicle? Is your vehicle simply used for a brief commute, or do you practically live out of it? If you eat, drink, or smoke in your car, you're likely to violate the terms of your lease agreement. Smoking, in particular, is a major problem on a lease where you need to return the car looking and smelling like new.
• What can I afford each month? If you're on a limited budget but really want to drive around in a vehicle with all the latest features, you may find that a lease is a better choice. This is the cheapest way to get into a brand new car.

After considering your lifestyle and budget, you should be able to determine whether a purchase, loan, or lease is the right option for you.

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Here are some more articles that may help you understand the different aspects of the car buying process:

• When is your credit score pulled?
• How to budget for big expenses
• How is a car loan calculated?