Leasing vs. Buying a New Car: The Pros and Cons of Each Choice

For many drivers, when trying to decide between leasing or buying a car, the decision might not be a super easy one. There are many arguments for you to lease vs. buy a car, including lower monthly costs and the ability to trade in the vehicle at the end of the lease term. 

However, buying a car gives you the advantage of owning an asset and allows you to eventually stop making car payments. Overall, one decision will be right for some drivers, but not all. 

No matter which option you choose, your vehicle must be protected by the right coverage. An independent insurance agent can help you get set up with all the car insurance you need. But for starters, here's a breakdown of the pros and cons of leasing vs. buying a new car.

What’s the Difference Between Leasing a Car vs. Buying?

When you buy a car, you can either pay the full amount upfront and immediately own the vehicle or make monthly payments towards a principal balance that will lead to you eventually paying off and owning the vehicle. 

When you lease, you can typically pay a much lower monthly amount in exchange for your use of the vehicle, which you're basically borrowing for a specified term. The amount you pay towards a lease is calculated by the dealership, which is just looking to make up the difference between the original value of the vehicle and its projected residual value when the lease term is over, in addition to extra finance charges. If you've been wondering whether it's better to lease or buy a car, you might find that leasing is the better option for you.

Leasing a car vs. buying has some differences that are critical to understanding before you ultimately choose which one you think works best for you. The difference between leasing and financing is that if you finance an auto loan, you'll eventually own the car because you're making monthly payments toward its principal balance.

On the other hand, with a lease, you're only paying to borrow the car for a while. So, you can get financing through your dealership for a lease, but at the end of the lease term, you don’t own the car outright as you would if you financed a car to buy.

Pros and Cons of Leasing a Car

Is leasing a car a good idea? For some drivers, definitely. Leases can offer the benefit of much lower monthly payments, for starters. Payments for a leased vehicle are almost always made to the car dealership from which you lease the car. 

In addition to the agreed-upon monthly payment for the vehicle, taxes, title fees, and other dealer fees are typically due at signing. Sometimes a down payment is also required upon signing for the vehicle.

However, leasing does have certain restrictions, including mileage. A lease term's mileage restrictions dictate how many miles the lessee is allowed to drive the vehicle within the term.

 However, mileage restrictions can be negotiated into the lease's terms (i.e., a lower mileage agreement can decrease the monthly payment). You might also determine your best course of action is to lease a preowned car.

Pros of Leasing a Car

Reviewing all the pros and cons of leasing a car can greatly assist you in deciding if this is the right course of action to take with your next vehicle. For many drivers, leasing provides a convenient and affordable way to gain access to a car for a set amount of time. Here are some of the major pros of leasing a car:

• Lower payments: Lease payments aren't being made toward the car's purchase price, so they're much cheaper than if you buy and finance a car.
• Less money down: Because the overall financing for a lease is cheaper, so is the initial payment when signing the contract.
• Manufacturer warranty: Leases honor the vehicle's manufacturer warranty in case of any issues.
• Option to get a new car every few years: One of the most attractive benefits of a lease for many drivers is that it allows drivers to try out a new vehicle every few years.
• Driving a late-model, better-equipped vehicle with the latest safety features: Leasing allows some drivers access to more expensive vehicles than they may be able to purchase outright or secure loans for.
• No resale worries: Because you don't own a vehicle at the end of the lease term, you'll never have to worry about reselling it and that whole process.
• Potential for tax deductions: This applies to drivers who use their leased vehicles for business purposes. Those who lease their vehicles may receive greater tax deductions than those who finance and plan to buy their vehicles since you can deduct depreciation and financing costs.

Cons of Leasing a Car

There are some possible drawbacks or turnoffs for some drivers when it comes to leasing vs. buying, which is why it's helpful to review all the pros and cons of leasing a car before you decide. Become familiar with these cons to leasing a car so you can better weigh your options of leasing vs. buying:

• Mileage restrictions: One of the biggest potential drawbacks of a lease is that the dealership determines how many miles you're allowed to drive the vehicle without facing additional costs.
• Additional costs/fees: Additional mileage and wear and tear of the vehicle are just a couple of ways a dealership can tack on extra costs and fees to your lease.
• Difficult to exit the lease: A lease is a contract, and it's a very difficult one to break. Before signing a lease, you'll want to be absolutely certain it's what you want.
• No ownership: If you lease a vehicle, you won't be able to call the car your own. You're technically only borrowing it.
• No option to make modifications: Since you don't own the vehicle, you won't be able to make any customizations or modifications that may better fit your style or preferences.

What Is the Downside of Leasing a Vehicle?

The downsides of leasing a vehicle can be numerous, depending on your personal preferences and needs for your car. The strict terms in a lease contract can be a huge downside for many drivers, especially those who prefer to modify and personalize their vehicles. Lease agreements do not allow this option. 

You'll also have strict mileage restrictions when leasing a vehicle that you just don't have if you buy your car. If you end up driving more than the mileage allowed in your lease contract, it can end up costing you a lot in the form of additional fees you owe at the end of the term. You may be charged an additional 10 cents to 25 cents per extra mile driven beyond your lease's allowed amount.

Also, there's not any room to change your mind about the vehicle you're driving if you enter into a lease. So, if you want to trade it for a newer model or a different kind of vehicle altogether, you could find yourself stuck until the lease term is over. That is unless you want to pay possibly hefty early termination fees. If you buy your vehicle, you're free to trade it in or sell it whenever you want to change cars.

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Pros and Cons of Buying a Car

Now that you're familiar with the pros and cons of leasing a car, it's time to weigh the pros and cons of buying a car. Overall, the biggest difference with buying a car from leasing is that at the end of the payment terms, whether you’re buying outright or financing, you will maintain possession of the vehicle. 

There are also more financing options when buying a car instead of leasing. Naturally, paying with cash or buying outright is an option, but when financing, you can shop around for the best rates from local banks and credit unions, online lenders, and the dealership.

Though leasing a vehicle provides a greater sense of freedom for some drivers, for others, it's the opposite. Buying a car allows you to customize and modify it however you like, for starters. 

Also, it can provide a sense of gaining traction for some drivers as they make monthly payments toward a principal balance on a loan, knowing that each payment is getting them one step closer to eventually owning the car. 

Pros of Buying a Car

Just as there are pros and cons of leasing a car, there are also pros and cons of buying a car. Here are just a few of the most commonly cited benefits of buying a car instead of leasing:

• No restrictions: While a lease sets strict limits on your allotted mileage and overall wear and tear of the vehicle, when you own a car, you don't have these restrictions. You can drive it as far or as little as you like every day you own it.
• Modify the car’s appearance: Owning a vehicle allows you the freedom to customize its appearance, including changing the paint job or tinting the windows as you see fit.
• Sell or trade in the vehicle as you desire: When you own your vehicle, you can sell it or trade it in for another model whenever you want. You don't have to wait for a lease term to be over to switch.
• Potential tax deductions: Buying a car offers the benefit of writing off the sales tax from the purchase on your next tax return.
• Long-term cost: Buying a vehicle instead of leasing can lead to lower long-term costs overall if you make monthly payments toward a principal balance without any hidden or extra fees from a dealership.

What Is the Advantage of Buying Your Car Over Leasing?

When you buy a car instead of leasing one, you're free to make any modifications or customizations you wish. You can tint the windows, change the paint job or interior, install a better sound system, switch out the tires or rims, etc. If you enjoy driving a vehicle you've personalized to feel like your own, buying is likely the right decision for you.

There aren't any mileage restrictions when you buy your vehicle, either. Though driving more miles per year may increase your car insurance costs, it won't leave you with additional fees like you'd have to pay at the end of a lease term. You're free to drive your car as often and as far as you like.

If you like switching vehicles frequently, buying rather than leasing can be easier. Many lease terms are for a period of three years, and trying to break one early to switch to a newer vehicle can lead to hefty early termination fees. If the thought of keeping the same vehicle for at least three years doesn't appeal to you, consider buying instead of leasing.

Buying a new vehicle instead of leasing can also save you money in the long term, while leasing can sometimes save you money upfront. Those who continually lease their vehicles are always stuck with a monthly payment, while buyers continue to make progress toward an auto loan's principal balance and pay less toward interest over time. 

There are also no hidden fees when you pay off an auto loan, though there can sometimes be additional fees at the end of a lease term. Further, you can sometimes experience tax benefits if you're able to write off the sales tax when you purchase a new vehicle. Make sure to ask your CPA about this.

Cons of Buying a Car

Make sure to review all the pros and cons of leasing a car, as well as the benefits and drawbacks of buying a car, before deciding which one is right for you. Just as there are some clear advantages to purchasing a vehicle, there are also a few possible negatives, including:

• Rapid depreciation: Though some drivers think of buying a car as an investment, the truth is that cars rapidly depreciate in value starting the moment you drive them off the lot. That means you're essentially losing a lot of money from the start.
• Higher monthly payment: When you finance a car through a loan instead of leasing it from the dealership, you'll be making higher monthly payments toward the principal balance, which can put a strain on some drivers.
• Larger down payment required: Buying a car instead of leasing also tends to require a larger down payment, which can also be a bit of a roadblock for some drivers in need of a vehicle right away.
• Long-term maintenance costs: Since you'll own a vehicle you buy for much longer than one you lease, typically, you can expect to pay much more toward the vehicle's maintenance throughout its lifespan.

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Is It Better to Just Lease or Buy a Car?

Unfortunately, there's no clear-cut answer to this question, as it's a highly individual decision for everyone. However, there are a few key questions to ask yourself when deciding which route is right for you when it comes to buying vs. leasing a car. Carefully consider each of the following:

1) How much are you willing to spend on monthly payments?

Leases come with the benefit of lower monthly payments than most auto loans for new vehicles. Since the lessee is only paying for the depreciation of the vehicle along with taxes and fees throughout their lease term, the monthly charge can be considerably lower than that of a new auto loan. That's because auto loans for new vehicles are designed to have the customer pay back the principal balance of the vehicle over time.

2) How much are you willing to spend over time?

Though leasing can be cheaper than buying a new vehicle for the first few months, it can end up being more expensive over time. Throughout the years, if you continue to keep leasing newer vehicles, you'll be paying a considerable amount towards the hefty depreciation each new car experiences in its first year of life. This can actually set you behind financially, as opposed to making steady progress on an auto loan year after year. 

Though the interest rate of your auto loan remains consistent throughout the loan term, the overall amount left on the principal balance decreases steadily over time as you continue to pay it off, meaning you owe less towards interest each month as time goes on.

3) How long are you willing to continue making monthly payments?

For drivers who perpetually lease their vehicles, a monthly payment is always required. However, for those who purchase their new vehicles, they'll eventually pay off their auto loans. 

Once the loan term is over and everything is paid off, no more monthly payments are required. But if you continue to lease, you'll never be free of a required monthly payment, which is something you'd always have to factor into your budget. This may set prospective homeowners back from achieving their goals.

4) How much do you want to spend on upfront costs? 

When you buy a car, you'll typically put down at least 20% of the purchase price as a down payment for a new vehicle or at least 10% for a used car. This means a large upfront payment of thousands of dollars, which can be steep for many customers to afford. 

For example, if you decide to buy a new car with a sticker price of $40,000, you should budget at least $8,000 as a down payment. Some drivers just can't afford this, which makes leasing the more attractive option. Many leases are available with $0 down for customers with good credit.

5) How much do you drive?

It's also important to consider how much you plan to use your vehicle when weighing whether to buy or lease. Many three-year lease contracts allow drivers to use the vehicle for a total of 36,000 miles, or about 12,000 per year. 

For those who drive more than this, they'll end up paying for each additional mile, which can be somewhere between 10 to 25 cents each. If you've driven well past the mileage allotted by the lease agreement, this can end up being rather expensive.

For example, driving just 400 miles past your lease contract's mileage stipulations at a rate of $0.25 per additional mile could end up costing you an extra $100. An additional 4,000 miles could end up costing you an extra $1,000 that you owe at the end of your lease. If you drive your vehicle a lot, you'll need to consider this fact.

6) Is having the latest model important to you?

Some drivers always want to be able to continue driving the latest model vehicle available. For those who continually lease, getting to drive a brand-new car can be a possibility every few years. 

Just keep in mind that if you want to switch to a newer vehicle right away, you typically can't break a vehicle lease early without penalties such as termination fees. Sometimes, early termination fees are equal to the amount still owed on the lease. 

If you buy your vehicle, though, you can sell it or trade it in whenever you'd like to get a newer vehicle. Many drivers trade in or sell their new vehicles after a couple of years to get a newer vehicle and use the profit gained from the sale or trade-in to put towards a newer model. Of course, this only works if you're caught up on your loan payments.

7) Do you keep your car in excellent condition?

Keep in mind that with a lease, you're required to return the vehicle in almost exactly the same condition as when the term began. Many lease terms are for a period of three years and allow only average wear and tear damage. 

If you're used to keeping your vehicles rather spotless and in pristine condition, this may not be an issue for you. However, if you frequently transport children, are prone to spilling drinks or otherwise damaging your car's interior, or have a tendency to get into fender benders, a lease may not be right for you. You could end up facing steep fines if you return a leased vehicle with stained upholstery, beyond-average worn tires, and missing or broken pieces.

8) Do you want to customize your vehicle?

Drivers who enjoy customizing their vehicles may prefer to buy rather than lease. If you want a custom paint job, specific rims or spoilers, tinted windows, etc., you won't be able to make any of these changes under a lease contract. 

Consider if having a customized vehicle is important to you. If so, you'll probably want to buy either a new or used car.

9) Do you need to use your car for business purposes?

Whether you'll be using your car for business can impact your decision to buy or lease, as well as which type of insurance you need. For leased vehicles used for business purposes, sometimes you can write off your lease payments as a tax deduction. 

You'll need to consult with your CPA about this first, though. If you own a car you use purely for business purposes, you may need to get a commercial auto insurance policy.

Whether You Buy or Lease — Make Sure You’re Covered

Hopefully, now you're able to make a better-informed decision about leasing vs. buying a car. Perhaps you will choose to lease vs. buy a car because of the benefits of leasing — or the freedoms that come with purchasing will convince you to buy instead. 

But regardless of whether it's owned or leased, a vehicle needs protection against the elements of nature, theft, collisions, and more. When it comes to finding the right car insurance, whether you choose to buy or lease your vehicle, working with an independent insurance agent is the best way to ensure you have the coverage you need.

FAQs about Leasing vs. Buying a New Car