If you’re wondering which option is best — lease vs. buy a car — keep reading. You have choices when it comes to financing your new vehicle, and both options have pros and cons. So before you sign on the dotted line, read our guide. We’ll weigh both methods side by side so you can pick the right one for your budget.
What Is a Conventional Car Loan?
When you buy a vehicle with a conventional car loan, you borrow money from a financial institution, like a bank, credit union, or a manufacturer’s financing company. You’ll make monthly payments to the lending institution for a set term of years, as determined by the creditor.
A portion of your payment goes toward paying the loan’s interest charge, while the lender applies the rest toward the principal balance. The higher your interest rate, the more your payment will be. As you repay the principal, you build equity until you pay off the car, and you own the car outright.
What Is an Automotive Lease?
Leasing is another common way to get yourself into a new car. It became popular in the 1990s because it offered a few appealing perks. When the process peaked in 1999, leases accounted for a whopping 40% of the total market. Today, about 20% of new vehicles that leave dealer lots are under a lease agreement.
Retail automotive leasing is much like renting a homeowner’s property. The person leasing a vehicle — known as the lessee — makes monthly payments for the privilege of driving the car, which still belongs to the finance company. However, in this case, your monthly payment isn’t going toward the vehicle’s principal. Instead, you’ll pay the difference between the car’s value when new and its expected value at the end of the lease — plus finance charges, of course.
When your agreement terminates, you’ll have two choices. You can return the vehicle to the dealership, or if you want to keep it, you can buy out your contract — as long as that’s an option in the fine print. You’ll typically need excellent credit to lease a new car. According to Experian, the average lessee in 2020 had an average credit score of 729. Remember that your lease’s payment history also affects your credit score, even though you don’t own the car.
The Advantages of Buying a Car
When considering whether to lease vs. buy a car, it’s essential to consider the pros and cons. If you want to control how often you use your vehicle, purchasing might be your best route. You won’t be held to the lease agreement’s strict regulations. Any damage you cause to your car could lower its trade-in or resale value and even void your warranty, regardless of ownership. However, you’ll still get to enjoy these benefits:
- You can keep your vehicle as long as you want to
- You can sell or trade it in at any time
- The vehicle will depreciate, but its cash value is yours to spend
- You’re free to drive as many miles as you want
- You don’t have to worry about wear and tear
- It’s yours to modify or customize as you like
The Pros of Leasing Your Vehicle
People lease a car for several reasons, and with sticker prices continuously on the rise, it’s a feasible alternative to financing. In fact, leasing can be more appealing for new car shoppers than buying in many circumstances, including:
- You get to drive a new car every time your lease is up
- A manufacturer’s warranty almost always covers the vehicle
- Some lease agreements include free routine maintenance
- You may be able to afford a more expensive and better-equipped car
- Your vehicle will have the latest technology and active safety features
- You don’t have to worry about depreciation or unexpected declines in your car’s value
- You won’t have to concern yourself with selling your vehicle
The Cons of Buying
Buying a car isn’t without its cons. The most significant disadvantage of buying a car is that you have to sell it when it’s time for a new one. Another downfall is financing. You’ll find that most loan payments are higher than those on a lease. For example, in 2020, you would have paid an average lease payment of $460 a month, while the cost to finance a new vehicle was $576.
Buying will cost more of your paycheck each month because your loan balance includes more than just the price of the car. Your payment may also include:
- Dealer documentation costs
- Motor vehicle title and licensing fees
- Sales tax
- Accessory upgrades
- Optional add-ons, like an extended warranty
The Downside of Leasing
With auto leasing, you only pay for depreciation, plus interest and fees. While that sounds like an attractive concept, the practice can end up costing you a bundle if you’ve never done it before. Be aware of the disadvantages of leasing, like:
- You could pay more than a loan with an equally short term because you’ll pay for most of its depreciation
- You’ll always have a monthly payment if you lease one car after another, and you’ll never pay off your vehicle
- You’ll have to pay a penalty if you exceed your contracted mileage limit, and you won’t get credit for unused miles
- You’ll have to pay excess wear-and-tear charges if you don’t maintain the vehicle in pristine condition
- Early termination fees can cost you thousands of dollars if you decide you don’t like the car or can’t afford the payments — and those costs are due when you return it
- You can’t customize your vehicle because you must return it configured like it was when it left the showroom
- Your contract may stipulate additional insurance coverage on a leased vehicle
- Your contract may require you to pay a fee when you turn in the car at the end of the lease, regardless of mileage or condition
Whether you should lease vs. buy a car is based on several factors, so crunch the numbers. Once you carefully assess your finances and driving habits, you can decide which option is the most cost-effective way to hit the highway with your new set of wheels.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.