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Pros and cons of leasing vs. buying a car

Bankrate logo Bankrate 8/11/2020 David McMillin
a person riding on the back of a car: Young woman sitting in the back of her car with her golden retriever © Eternity in an Instant/Getty Images Young woman sitting in the back of her car with her golden retriever

Leasing a car and buying a car will both put you in the driver's seat, but with different financial implications.

Leasing a car

When you lease a car, you pay for the right to drive the vehicle for a fixed period of time - typically three or four years. Most leases are financed through the dealer.

You will usually pay an initial amount to drive your new vehicle off the lot to cover a range of taxes and fees. Then, you will make monthly payments over the life of the lease to cover the costs of depreciation of the vehicle. There are typically restrictions on the number of miles you can drive the car during the lease term, and you have to return the vehicle to the dealer in excellent condition to avoid extra fees.

Buying a car

Buying a vehicle means you maintain possession of the car instead of leasing it for a few years. If you're looking for a brand new car, it can have a big price tag, too. The average cost of buying a new vehicle in January 2020 was nearly $38,000, according to data from Kelley Blue Book.

There are other more affordable options for buying a car, though, including certified pre-owned vehicles and used cars. For new cars purchased with a loan, the price tag for your monthly payments is typically higher versus leasing. However, the vehicle is officially yours once the vehicle is paid off.

Pros and cons of leasing a car

ProsCons
Lower monthly paymentsMileage restrictions
Lower drive-off-the-lot fees (potentially no down payment)Potential for extra fees (early termination, mile overages and a range of other unexpected costs in the fine print)
Ability to drive the latest modelAdditional insurance coverage is necessary
Warranty protection through the lease term (typically three years or 36,000 miles)The need to get a new car at the end of the term

Benefits of leasing a car

If you're trying to keep your monthly spending in check, leasing a car tends to offer the perk of making lower payments versus buying the same car. In addition to what you pay throughout the lease, the initial sticker shock may not be as bad: You may not need to put any money down to drive off the lot. While you have the keys, you will enjoy the benefit of warranty protection, which typically lasts for the first three years or 36,000 miles.

Drawbacks of leasing a car

Leasing may make it financially easier to put you in the driver's seat of a new car, but you won't be fully in control. Most leases come with annual mileage restrictions, typically ranging between 10,000 and 15,000 miles. If you exceed those limits, you'll pay a premium - typically around 30 cents per mile. You'll also need to pay for comprehensive, collision and gap auto insurance to avoid being on the hook for the value of the car in the event of an accident. And when the lease is up, you have to start your search for a new set of wheels.

Pros and cons of buying a car

ProsCons
No mileage limitsHigher monthly payments
No wear-and-tear chargesBigger down payment required
The ability to sell or trade in the vehicleLong-term maintenance costs

Benefits of buying a car

No mileage limits: When you buy a car, you won't have to keep an eye on your mileage. If you want to drive across the country, or rack up 100,000 miles in a year, you can do so without worrying about extra fees.

No wear-and-tear charges: In addition to a lack of mileage restrictions, you won't have to worry about what a dealer deems as "normal wear and tear," which is a concern for anyone who leases, or need to pay for potential repairs at the end of a lease.

The ability to sell or trade in the vehicle: Because the car is yours, you won't need to think about what to do when your auto loan is paid in full. When you're ready for a new car, truck or SUV, sell it or trade it in at its current market value based on mileage and condition.

Drawbacks of buying a car

Higher monthly payments: When you buy a car, you're probably going to spend more each month. For example, the average monthly payment for those who bought a Jeep Grand Cherokee was $637 - $159 more than an average monthly payment for leasing it, according to Experian's State of the Automotive Finance Market report issued in the first quarter of 2020.

Bigger down payment required: If you put more money down, of course, you can reduce the size of those monthly payments, but it will take a bigger chunk of your savings.

Long-term maintenance costs: Lastly, owning a car comes with the same mix of pride and potential problems as owning a house: It feels good to say you own it until you have to pay to fix it when something breaks.

Comparing the costs of leasing vs. buying

To get a sense of how the costs differ when you drive off the lot, consider the breakdown below that shows the costs of leasing or buying a 2020 Toyota Camry over a six-year period.

The car's estimated price is $25,925, and both options assume you drive 15,000 miles each year. Remaining value is based on Edmunds' depreciation estimates. This also assumes you find the exact same three-year lease deal twice in a row and make the same initial payment. These figures do not include tax, title, license and registration fees.

72-month loan36-month lease
Down payment$3,000None
Monthly payment$339$275
Cash out of pocketNone$3,000
Interest rate2.9%Money factor 0.00125
Payments in three years$15,204$12,900
Residual value$17,341$17,341
Payments in six years$27,408$25,800
Your remaining value$10,800$0 (you need to get another car)

It's important to note that you can make an impact on the costs of buying by opting for a shorter loan. For example, if you adjust the 72-month loan for the Camry above to a 60-month loan, the monthly payments would increase to $373, but you could qualify for an attractive 0 percent financing deal that eliminates interest charges. You'd also own the car outright in five years instead of six.

Bottom line

Determining whether you should lease or buy a car depends on a careful assessment of your personal finances and your driving habits. Think about how much you can comfortably afford to pay upfront and each month, and consider how many miles you spend on the road to figure out the most cost-effective way to hit the highway. When you know what kind of car you want, crunch the numbers with Bankrate's Lease vs. Buy calculator to figure out the best financial move.


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