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Both leasing and buying a car come with benefits and drawbacks, so the decision between the two ultimately comes down to your budget, lifestyle and long-term financial goals. If you prefer to drive new cars, want to make lower monthly payments and aren't concerned about building equity, leasing might be the right choice for you. However, if you hope to use your car as a trade-in for another car down the road, you want to own your vehicle outright after paying off your loan, and tend to buy and hold on to your cars, buying may better suit you.
Here's what you need to know about each option to determine which one is better suited to your needs and preferences.
| Leasing vs. Buying a Car | |
|---|---|
| Key Features of Leasing a Car | Key Features of Buying a Car |
| Typically only for newer cars | Includes both new and used cars |
| Smaller down payment and lower monthly payments | Larger down payment and higher monthly payments |
| Lease terms usually range from two to four years | Loan terms may range from one to seven years |
| Doesn't allow you to build equity in the vehicle | Allows you to build equity in the vehicle |
| May come with usage restrictions | No usage restrictions |
| You typically return vehicle when lease ends | You own vehicle outright when loan ends |
Benefits of Leasing a Car
Leasing your next vehicle can be a good idea if you're on a tight budget or you don't want to deal with hefty repair costs. It can also be easier to transition to a new vehicle at the end of your lease. Here are some more details on the advantages of leasing.
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 the car's value when you lease it and the residual value, or what the dealer projects the car will be worth when you bring it back at the end of the lease.
As a result, monthly payments tend to be lower compared to auto loans. What's more, leases often don't require a down payment, and because the car is typically new, maintenance and repair costs are usually low.
Learn more >> How Much Does It Cost to Lease a Car?
New Car Experience
With most leases running two to four years, you'll always be driving a brand new or nearly new car. If you have a job that requires you to keep up appearances or you're simply not the type to run your vehicles into the ground before switching, leasing could be worthwhile.
Additionally, leasing also gives drivers the chance to get a bigger or more deluxe vehicle than they could afford if they were buying it.
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.
Potential Tax Benefits
If you're a small business owner, you may be able to deduct some of the costs associated with leasing. In particular, you can deduct mileage based on the standard rate or deduct your actual expenses, which includes your lease payment.
Additionally, if you lease an eligible electric vehicle (EV), you may benefit from a federal tax credit on EVs.
Drawbacks of Leasing a Car
While there are some clear advantages to leasing over buying, it may end up costing you more in the long run. It's also crucial that you fully understand the lease agreement before signing, which can be challenging. Here are some potential pitfalls to watch out for.
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.
Also, with few exceptions, leases typically don't build positive equity you can put toward another vehicle in the future.
Potentially Costlier Overall
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.
What's more, you may also be on the hook for end-of-lease costs like mileage surcharges or excessive wear and tear penalties.
Tip: Leasing companies usually require you to obtain full coverage auto insurance. However, that's also the case if you take out an auto loan to buy your vehicle. The difference is once your loan is paid, you can reduce coverage if you choose. If you replace one leased car with another, you'll continue paying full coverage.
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.
Benefits of Buying a Car
Buying a car may be costlier in the short term, but it gives you more autonomy and can be a better financial decision in the long term. Here are some of the advantages to consider.
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.
Once the loan is paid in full, you'll receive the total and own the vehicle outright.
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.
If you decide to hold on to your car, you could even tap some of the equity you have in the form of a cash-out refinance loan.
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.
Potential Tax Benefits
If you're a small business owner, you may be able to deduct certain expenses related to your vehicle, such as depreciation, gas and oil, tires, repairs and maintenance, insurance and registration fees. Alternatively, you can deduct your mileage using the standard rate.
Also, you may qualify for a tax credit if you buy an eligible electric vehicle.
Drawbacks of Buying a Car
Although the math may be on your side in the long run, buying a car also comes with some disadvantages, especially if you're on a tighter budget. Here are some drawbacks to consider.
Higher Upfront Costs
When buying a car, you may need to put down more money than you would with a lease. If you don't have much cash on hand or you don't want to dip into other savings goals, you may have a harder time finding a loan with favorable terms.
Learn more >> How Much Car Can I Afford?
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 or repossessed, you'll need to make a lump-sum payment to the lender to cover the shortfall.
Learn more >> What Is Depreciation on a Car?
Is It Cheaper to Lease or Buy 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.
According to Experian's State of the Automotive Finance Market Report for the second quarter of 2024, the average monthly payment for a lease is $586, while the average monthly payment for a new car loan is $734.
In particular, leasing is an attractive option for more expensive models that may be out of reach for some buyers. For example, more than 46% of all new electric vehicle purchases are leases. Additionally, luxury brands like BMW, Mercedes-Benz, Volvo, Porsche and Audi are all leased at a rate higher than 50%.
In the long run, though, 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?
Whether you should lease or buy a car comes down to your personal priorities and financial situation. Neither option is inherently better than the other, so it's important to know your goals to determine which route to take.
You should consider leasing a car if:
- You like getting a new car every few years
- You don't want to pay for long-term maintenance
- You prefer a lower monthly payment
- You have great credit
- You don't drive more than 12,000 to 15,000 miles each year
- You're not concerned about building equity in the long run
Tip: As with an auto loan, you can build your credit score with a lease.
You should consider buying a car if:
- You want to hold on to your car for as long as possible
- You're thinking about getting a used car
- You want to build equity in your vehicle
- You're not interested in mileage and other restrictions
- Your credit doesn't qualify you for a lease
- You want to save more money in the long run
Check Your Credit Before You Buy or Lease
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.
You can also review your free Experian credit report to get a deeper understanding of your credit profile and look for ways to improve your credit before you lease or buy.