Deciding between leasing or buying a car comes down to your priorities. For some, having ownership of the car is important. For many others, it comes down to choosing the least expensive option.

Before you make a decision, it's important to understand the key differences between the two options. In this guide, we’ve highlighted the key factors you should consider when comparing leasing vs buying a car and when it makes sense to choose each option.

An Introduction To Leasing vs Buying a Car

If you’re in the market for a vehicle, it’s important to understand all your options before you take on any new car debt. When you purchase a car, you own it after you pay off the loan or outright if you pay for it upfront.

You also have complete control over every aspect of the car and can customize it or drive without any mileage restrictions. You can decide to keep the vehicle, sell it, or trade it whenever you want.

How does leasing a car work? When you lease a vehicle, you pay for the privilege of driving it for a fixed period of time, similar to renting a vehicle.  But with leasing, you will be able to drive it for a much longer period of time. Car leases are 24 to 36 months on average. While this provides a considerable amount of flexibility and affordability, there will be restrictions on modifications and the number of miles you can drive.

At the end of the lease period, you can return the car to the dealership or purchase it, as specified in the contract.  If your lease contract provides for it, you may even be able to extend your lease by as much as 6-12 months if you wish to drive the vehicle for a little while longer.

Below are the major lease vs buy differences to consider.

OwnershipYou own the carYou don’t own the car
Monthly PaymentsLoan payments are higher than lease payments over the same term.Lease payments are almost always lower than loan payments over the same term.
Upfront CostsDown payment, registration, taxes, and loan origination feesDown payment, security deposit, registration, taxes, lease acquisition fees, and first month’s payment.
MileageNo mileage restrictionsMileage restrictions are specified in the lease contract. If you return the vehicle to the dealership at the end of the lease term, you’ll pay extra for exceeding mileage restrictions on a cents-per-mile basis. If you purchase the vehicle at the end of the lease, these fees will not apply.
Early TerminationYou can trade-in for a new vehicle or sell it anytimeTerminating your lease contract can be very expensive
CustomizationYou can customize the vehicle as you wantYou’ll need to remove any customization or modification and return the vehicle in its original state at the end of the lease

When To Lease a Car

When you lease a car, you can use it for as long as you pay for it. While you may not build any equity in the car, it may still be a better option in some situations. Leasing is a good option if you want to drive a brand-new and/or higher-end late-model vehicle every two to three years without a lot of upfront costs and want to keep the monthly costs lower.  It’s also a good option if you’re someone who typically keeps your car clean and in very good to excellent condition the entire time you own it.

“When comparing it to a loan, a lease contract may give you more options as to what to do with your car at the end of its first two or three years of life on the road, especially when it comes to its resale value,” shares Brad Reichert, a financial expert, and the founder and managing director of Reichert Asset Management LLC.

Keep in mind, however, that there may be excess mileage charges, excessive wear and tear charges, and other costs that come with leasing if you tend to be harder on your car in terms of how far and how often you drive it.  For example, if you drive longer distances on a regular basis, leasing may not be the right option for you.

Let’s consider an example. You normally use your car to get to and from work and for running errands. You want to drive a brand new or late-model higher-end vehicle with a purchase price of $70,000 but want to keep the monthly costs as low as possible.

With a down payment of $5,000, your monthly installments will be approximately $1,400 if you finance the vehicle for 60 months. If you lease the same car for 36 months with the same down payment, your monthly payment will be approximately $1,000.

When comparing a loan vs leasing a car in this example, a leased car is less expensive and a better option, especially if you prefer to upgrade your car every few years.

Lower Monthly Payments

One of the main benefits of leasing is that it offers lower monthly lease payments when compared to financing. If you have a limited budget, leasing may be a cheaper option, as seen in the example we’ve provided above.

While you may be able to get a term of as long as 120 months on a loan to lower your car loan payments, you may end up paying more interest over the life of the loan. Plus, the longer you use the vehicle, the more value it’ll lose due to depreciation each year.

A longer-term loan may also lead to negative equity, where you owe more than the value of the car if it depreciates in value faster than expected or falls out of favor with the car-buying public. This can make it difficult to sell or trade in the car when you want to. For this reason, leasing is often the better option if you can’t afford monthly payments on a car loan without an extended loan term of over 60 months.

Leasing can also make sense if you don’t have a trade-in vehicle or a large down payment to make on a new car.  Because leases are based on the vehicle’s usage for the first 2-3 years of its life, the vehicle’s depreciation–the largest percentage of which occurs in the first two years a vehicle is driven–is already factored into the lease payment (a dollar value referred to in most lease contracts as the “capitalized cost”).  

This means a large down payment of 20% or more is typically not needed.  Oftentimes, a small down payment of just $1,500-$2,000 plus the first month’s payment, plus other taxes and fees, are due at lease signing, and you can drive off the lot in a brand new vehicle.

Limited Mileage

Because the vehicle you turn in at the end of your lease will be re-sold in the general marketplace, banks and lease companies set limits on the number of miles you can drive each year.  These mileage limits will be clearly specified in your lease contract. For typical three-year car leases, contracts usually allow a total of 36,000 miles over the term or an average of 12,000 miles per year. 

It’s always best to consider your typical car usage and whether you’ll be able to stick to this mileage restriction, especially when you’re nearing the end of your lease term.

If you exceed the allowable mileage, you’ll have to pay up to 30 cents for each additional mile you’ve gone over that limit at the end of your lease. If you’ve gone over these limits by thousands of miles and do not plan to purchase the vehicle for its residual value at the end of the lease term, this can end up being quite expensive. 

For example, if your three-year lease contract specifies a limit of 36,000 miles, and at the end of those three years, your odometer reads “42,500,” you could face an excess mileage charge of $1,950 or more when you turn in your vehicle.  

 On the other hand, if you have driven considerably less than the allowable mileage in your lease, it is certainly not a “use it or lose it” kind of situation when it comes to the odometer.  Most lease contracts these days will offer a small credit of 10-15 cents per mile below the lease mileage limits when you turn in your vehicle.  

Therefore, in this example, we can see that if you’re a high-mileage driver or are someone who doesn’t drive a vehicle much at all, it may be better to purchase a car with a loan instead of leasing it.

Lack of Ownership

One of the main factors to consider when you lease vs buy a car is that you don’t own the vehicle when you lease it. One of the main reasons why lease payments are lower than loan payments is because, when leasing, you’re paying primarily for the depreciation in the vehicle’s value over the first 2-3 years (or 24,000-36,000 miles) of its life–a very small portion of the 12-15 year (or 200,000+ mile) average lifespan of a new vehicle built today.  

With leasing, you pay for the right to drive it for those 24-36 months, then you must return it when your lease ends, similar to returning a rental car at the end of a vacation or business trip.  Or, you may choose to purchase it for a predetermined residual value if your lease agreement allows a buyout option.  With a loan, you are paying for the entire cost of the vehicle over the life of your loan, which is often 3-4 times the total cost to lease the same vehicle.

While lease payments are lower than loan payments, there are other costs involved, such as a down payment, security deposit, early termination fee, registration, taxes, and an acquisition fee. Even after all these costs, you don’t own the vehicle. On the other hand, you don’t have to worry about the resale value or negative equity, as all of that is accounted for in your lease payment.

Consider this when deciding if it's better to lease or buy a car.

When To Buy a Car

Buying a car is usually a sound financial choice in the long term if you plan to purchase and hold it for several (7+) years. Although you’ll have to do some homework to understand how car loans work, you’ll have full control of the car and every aspect of it if you purchase it. Another benefit of buying a car is that you can drive without any mileage restrictions for the next 15+ years.  Or if you’re finally ready to upgrade, you can trade it in or sell it any time you want.

Let’s consider a scenario. You use your car for work and also frequently use it for long road trips. You can afford to put down 10% to 20% and finance the remaining cost of the vehicle. After a quick pre-approval for an auto loan, you determine that you can comfortably afford the monthly payments for a term of 60 months.

Buying a car would be a sound financial choice in this scenario, especially if you plan to keep using the car even after you pay off the loan.

Keep in mind that while most cars are built to last longer than they did just 10 years ago, the average cost of a brand-new vehicle has increased to just under $50,000.  As a result, automobile loan terms have gotten longer and longer to help buyers afford the payments to buy them.  

The average length of a new car loan is now 68 months (just over 6-½ years).  If this new record-setting average length of time spent paying off a loan on today’s new cars and trucks puts it in perspective for you, you can see why most people who buy their new car via a loan (instead of a lease) tend to drive it for quite a long time.

Full Ownership

When you purchase a car, you’re investing in an asset, and you gain full and complete ownership of it, from bumper to bumper. You have complete freedom to trade it in or sell it to pay off the loan and pocket the rest of its sale proceeds. Another major benefit is that if you continue using your car after you’ve paid off the loan, you won’t have to worry about any monthly payments.

Freedom to Customize

Buying a car gives you the freedom to do what you please with it as long as it remains safe and legal to drive on the roads. You can customize the vehicle to make it your own, change the color, modify it, or add/remove accessories. You won’t have the same benefits when you’re leasing a car.

In some cases, your lessor may agree to some modifications, but you’ll have to return the car to its original state at the end of the lease term.

Potential Depreciation

Because most vehicles these days have a finite average lifespan of about 12-15 years, the value of your vehicle will depreciate over time whether you purchase a used car or a new car. If the vehicle loses its value faster than you pay down your loan, you may end up with an upside-down car loan, otherwise known as having “negative equity” in your vehicle.

If you trade-in or sell your vehicle, you’ll have to cover the shortfall or roll the balance into a new loan.  When leasing a vehicle, this assumed depreciation rate is factored into your lease payment to reduce or even eliminate the chances of you ending up with a negative equity position in your car.  

Make an Informed Decision

So, is it better to buy or lease a car? That depends on your financial situation, driving needs, and lifestyle. Leasing can be a better option if you want to drive newer cars with the latest technology and styling every 2-3 years, don’t want the hassle of selling every time you upgrade, or simply want a lower down payment and monthly costs. 

Consider the cons of leasing, such as mileage restrictions, keeping wear and tear to a minimum, and the potential fees you may have to pay at the beginning and end of your lease term.

Buying a car is a better choice if building equity and having complete control over the vehicle is important to you. Consider your credit score and if you’ll be able to qualify for an auto loan with affordable car payments. If you plan to buy, compare your options and interest rates offered by different lenders as you begin your car-buying process.

We recommend speaking with others who have leased or purchased vehicles to understand their experience and whether they liked their experience to make an informed decision.