Should I Buy or Lease a Car? Here Are the Factors that Matter

Written by Kim PinnelliReviewed by Anders Skagerberg, CFP®Updated: 13th Sep 2022
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Choosing whether to buy or lease a car is a big decision and one you should consider carefully. Here’s everything you must know to help you make the right decision.

Should You Lease or Buy a Car?

It’s the age-old question – is leasing or buying a car better? Unfortunately, there’s no one-size-fits-all answer. You must evaluate your situation, future goals, and decide what you can afford.

Leasing vs. Buying a Car Factors to Consider

Leasing Factors

  • Monthly Lease Payments: Lease payments are usually lower than car loan payments because you aren’t financing the full purchase price of the loan. You only pay the car’s expected depreciation during the lease term. This often allows you to drive a ‘fancier’ car than you’d be able to afford if you bought and financed it.
  • Car Insurance: You may need more insurance when you lease a car. Leasing companies often require more liability coverage than you need, and they may also require gap coverage to protect them if you were to total the car.
  • Mileage: You can only drive a certain number of miles according to the lease agreement. If you surpass the total allowed miles, you’ll pay an excess mileage fee which adds to the cost of the lease.
  • Security Deposit: You will need to make a security deposit, usually just one month’s payment upfront, but it can be higher with some leasing companies.
  • Early Termination Fee: A lease is a contract. You could get hit with an early termination fee if you end it early. Leasing companies charge this to make up for the money they planned to make on your lease agreement when you signed it.
  • Disposition Fee: Most leasing companies charge a lease disposition fee to clean and fix up a car after turning it in at the end of the lease.
  • Flexibility: Leasing gives you the option to change cars often. When your lease expires, you turn it in and start a new lease (or buy a car). People who like to have the latest model and gadgets in their car prefer to lease to afford new cars every few years.
  • Short-Term or Long-Term: If you like to keep your cars for a long time, leasing isn’t ideal for you. Car lease terms are usually 24 to 36 months. You turn the car in or buy out the lease at the end of the lease, but it doesn’t always make financial sense to do so. If you prefer to keep cars longer than 2 or 3 years, buying may be a better option.
  • Repairs: You may save money on repairs when you lease because you’ll turn the car in before it gets old enough to have a lot of trouble. Leased cars are usually under warranty, but you may still be responsible for cosmetic issues, worn-out tires, or other basic issues that a warranty doesn’t cover.
  • Tax Benefits: If you own a business, you may be able to write off the lease payments as a business expense if you use your car for business.
  • Maintenance Costs: Every lease is different. Before you sign a lease, determine which maintenance costs you’d be responsible for. Some lease companies cover everything, while others put some of the responsibility on you.

Buying Factors

  • Loan Payments: You’ll pay principal and interest charges monthly when you finance a car. The amount you borrow gets divvied up across the loan’s term, and the interest charges are added based on the interest rate the lender gives you. Loan terms can range from 2 to 7 years. The longer you borrow the money, the higher the interest charges.
  • Car Insurance: Auto Loan Lenders will require you to carry car insurance and to name them on the policy. Most lenders require you to carry full coverage car insurance. Surprisingly, your insurance costs may be lower when you buy a car because you don’t need gap coverage or the high liability requirements leasing companies require.
  • Wear & Tear: You don’t have to worry about any wear and tear you do to the car as far as anyone else is concerned. Unlike when you lease, you won’t get charged for excessive wear and tear when you sell the car. Of course, it can decrease how much you get when you sell it and cost you more money to repair, but no one will force you to fix it.
  • Maintenance & Repair Costs: If you buy a new car, it will likely be under warranty for a few years. Certain repairs, like tires, oil changes, and new batteries, are your responsibility. After the warranty expires, all repair costs fall on your lap, and the older a car gets, the more expensive its needs may become.
  • Inspections: When you buy a car, it’s up to you to make sure it’s in good condition. If you buy a used car, it’s a good idea to have it checked out by a mechanic or trusted friend to ensure it’s in good condition and doesn’t have any major defects or concerns. Once you buy it, the car is yours – you can’t turn it in like you can a leased car.
  • Long-Term: Most people that buy cars do so for the long-term. It’s expensive to buy and sell cars every few years. Since cars lose 20% – 30% of their value in the first couple of years, you could be upside down within a few years if you try to sell it too soon.
  • Equity: Any principal you pay down on your car loan becomes equity in the car. This means any amount you paid down, you own. If the car is worth $10,000 and you owe $8,000, you have $2,000 in equity. Your equity increases each month when you make payments.

Is It Cheaper to Buy or Lease a Car?

If you’re comparing leasing or buying a new car, leasing is often cheaper in the long run. On average, you’ll save $2,500 over six years in out-of-pocket costs (not including maintenance and repairs). But, if you’re considering leasing a new car or buying a used car, you’ll save over $5,000 in out-of-pocket costs buying a used car versus leasing a car.

>> More: How to Lease a Car

When Does Leasing a Car Make Sense?

Lease a car when you know you only need the car for the short-term or you know you’re the type that likes new cars every couple of years. Car Leasing can also make sense if you don’t drive much. Say, for example, you now work from home like millions of others and only drive 10,000 miles a year. You might save more money leasing a car versus buying one.

When Does Buying a Car Make Sense?

Buy a car if you like to hold onto your cars for a long time or don’t like to be told how many miles you can drive or what wear and tear is acceptable. You’ll need a down payment and must be able to afford the higher monthly payment, but you’ll earn equity in the car and can sell it at any time without anyone’s permission.

Can You Lease a Car First and then Buy It After a Few Months?

You may have the option to buy out a lease at the end of it, but buying out a lease after a few months usually isn’t allowed. Every lease agreement is different, though, so read the fine print to find out if you can change your mind and buy the car versus leasing it.

Bottom Line: Should You Lease or Buy a Car?

Deciding whether you should lease or buy a car is a big decision. It’s one you should consider carefully by looking at all of your factors. Look at the total cost of both options as well as the restrictions and convenience of each option to decide which is right for you.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.