Leasing a Car vs. Buying: What’s the Right Choice for You?

A car is more than just a means to get from point A to point B. It could be a tool for self-expression, a gateway to future adventures or the beginning of a lifelong hobby. It’s natural to spend time weighing your options when getting hold of your vehicle of choice, and a key consideration is leasing a car vs. buying.

To help you make the right decision for you, we’ll dive into what both options involve, then review the pros and cons. For most people, there’s a clear winner. Keep reading to find out which it is. 

Leasing a car vs. buying: What’s the difference?

Before we explain the pros and cons of both options, let’s get our definitions straight. What does leasing a car vs. buying ultimately involve?

If you want to buy a car, you have two options:

• Pay 100% of the vehicle’s value upfront with cash 

• Take out an auto loan

We’ll focus on the second option, as it’s more common and comparable to leasing.

The difference between leasing and buying is similar to renting a property over taking out a mortgage. Both options involve monthly payments, but they have different structures and end goals.

A car loan involves borrowing money directly from a lender (usually a bank or a credit union) or obtaining financing through the dealership. You’ll face an:

• Interest rate

• Loan term

• Down payment of between 10% and 20%

All these expenses can impact monthly payments. Over time, these payments will allow you to pay off your loan until the car eventually belongs to you — just as a house would belong to you after you pay off the mortgage.

Meanwhile, in a lease, you pay a fixed monthly amount for the duration of the lease term. Instead of paying interest, you’ll face charges for leasing. 

You’ll have to hand back the car when your lease is over. However, you may have the option to purchase your vehicle at the end of the lease term by paying its residual value (meaning the vehicle’s value with depreciation accounted for).

The benefits of leasing

If it’s instant gratification you’re after, a car lease may be the way to get it. Because you’re not paying to own the vehicle, you’re typically able to secure a car for lower monthly payments than what you could get from a loan. Car prices and interest rates are on the rise — new vehicle loan amounts increased by 8.8% from 2020 to 2021, while used car loan amounts rose by 20% — which may be a significant factor.

Another consideration is that the costs involved in leasing are more predictable. Just as a landlord covers basic property repairs for renters, leasing means you won’t have to cover all the expenses involved with a vehicle. However, it’s best to check which maintenance costs will be covered in your lease contract; there may be some variation. Also, there are often penalties for excessive wear, so you’ll still want to take good care of the car.

Although leasing means you won’t own the car when the lease ends (unless you end up buying it), moving from one lease to another means access to updated vehicles, avoiding the repairs and breakdowns that tend to come with older cars. You also won’t have to worry about the trade-in value when you opt for a leased vehicle, which could be great if you’re not a natural haggler.

With these benefits in mind, it’s no wonder around a quarter of new vehicle sales in the U.S. are leases.

The cons of leasing

As is often the case, leasing comes with a catch or a few catches.

Although lease payments are lower, the bad news is that they never end. You’ll always have to figure car payments into your budget, which isn’t ideal for anyone trying to cut costs or save money.

This often means it’s a poor financial decision. You’ll face the unavoidable costs of keeping the lease going, but you won’t get the benefit of owning an asset by the end of it. 

Considering the average depreciation of a car is 40% in its first five years, this is a big deal. If you jump from one lease to another, you’ll have to front the most expensive part of buying (since leasing payments account for depreciation costs).

Another consideration is that some leases include mileage limits, often 10,000 to 15,000 miles annually, and exceeding this limit could lead to a penalty.

Some potential fees are associated with finishing a contract early or making late payments. And although some maintenance costs are covered, you’ll still be expected to return the car in good condition. Then, there’s the acquisition fee for starting the lease and the cost of oil changes if they aren’t covered in your lease agreement. 

For many car shoppers, leasing a vehicle won’t make sense financially. 

The benefits of buying

The biggest pro of buying a car is that you’ll own it by the end of the process — meaning it’ll be yours to use as much as you want without monthly payments (potentially saving you hundreds per month). 

Alternatively, you can opt for a trade-in and use that as part of the down payment toward your next car. This might be a simple advantage, but its importance can’t be overstated.

When you buy a car, it’s an investment — not just a recurring cost to drive a vehicle for a while like a lease.

You’ll reap the most benefits if you keep a car for as long as possible after buying it instead of continually buying new cars. This can help you keep monthly costs low and avoid the steep depreciation of a newer vehicle. 

Buying a car may offer more flexibility than a lease. There are no mileage restrictions, and you’ll be free to carry out customization projects to your heart’s content. 

The cons of buying

Even though buying a car is the typical recommendation, there are still a few caveats.

Car loan payments will likely be higher than leasing, especially if you want a nicer, newer vehicle. You could face even higher interest rates if you have a poor credit score,  as banks and auto dealers consider you a risky or less creditworthy borrower.

Plus, there are more upfront costs, including:

• Finance charges for taking out the loan

• The down payment

• Any repairs that crop up (this is where an emergency fund can come in handy) 

Overall, there are some cons to buying a car, but they pale compared to leasing. However, if you want a new vehicle every few years, purchasing a car might not be economical due to the costs of regularly trading in — not to mention the hassle.

Which is right for you?

We’d all like to secure that dream car, and leasing is the fastest way to achieve that, thanks to the lower monthly costs you’ll face over the short term. 

However, when you really weigh the financial factors, buying a car makes more sense for most people. The longer you keep the vehicle after your purchase, the more you’ll be able to save.

However, before committing to a car loan or lease, it’s wise to pay attention to your other monthly costs — especially credit card debt. The Tally† credit card repayment app may be able to help you get on top of your credit card debt by consolidating your higher-interest credit card balances into one lower-interest line of credit.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.