Is it Better to Lease or Buy a Car? It Depends

Cars are among the most expensive purchases we’ll make. It’s therefore understandable that consumers want to make the right choice in deciding how to pay for a new car, whether to buy or lease.

When deciding on the best option for your unique circumstances, it really depends on your lifestyle and priorities. Car buying is just one consideration that needs to fit in a much larger picture. In reality, the perfect option for one person can be totally wrong for another.

First off, let’s consider how a lease differs from financing. When you lease a vehicle, in effect you are paying for your “use” of the car. You don’t own it. Rather, you get exclusive rights to use the car, for a predetermined period of time. Basically, you are paying for the equivalent amount of the car that you “use up”. Leasing has a number of cumbersome restrictions, not the least of which is that it is very difficult to get out of or transfer a lease. Generally, once you’re in a lease, you’re in it for the entire term.

Financing, on the other hand, gives you full ownership to do with the car as you please. There are no restrictions on how you use, or how long you keep a car when you finance.

So, is there a way of simplifying the debate to decide which is better? Absolutely. When you get right down to it, the buy versus lease discussion is about how much you want to pay and when.

Leasing short-term costs are always much lower than buying. For the exact same car, at the same price, same repayment period, and same down payment, a monthly lease payment will range from 30%-60% lower than loan payments. And, that’s even if you’re comparing to low down payment or low-interest loans.

In the medium-term, the cost of leasing a car is fairly equivalent to the cost of buying, if one were to sell a car at loan-end and an equivalent leased car is returned at lease-end. Financing generally has fewer fees, lower total finance costs, and this parity relies on a purchased vehicle providing full market value when sold or traded at the end of the loan (which is certainly not always the case). Of course, with leasing you benefit from a significantly lower monthly payment, the savings with which you are free to invest or spend on other expenses.

Finally, the long-term cost of leasing is always greater than the cost of financing a car if a buyer keeps a vehicle for years after loan-end. That’s because the cost is spread over a longer term, with all the expenses pre-paid.

So, lease or buy?

If you want lower monthly payments, like having a car that has the latest safety features and is always under warranty, don’t like trading and selling used cars, don’t care about ownership equity, properly maintain your vehicle, and are willing to pay more over the long haul to get these benefits, then an auto lease is right for you.

If you don’t mind higher monthly payments, prefer to build up some trade-in or resale value, are more comfortable having out-right ownership, like paying off your loan to be payment-free for a while, don’t mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, and don’t like the risk of surprise lease-end charges, then an auto finance is the way to go.

Ultimately, the question becomes, do you want more car for less monthly expense, or would you prefer the flexibility of being able to sell your vehicle at your whim. The choice is yours.

About the Author

Michael Lee-Smith has been investing in residential real estate for over a decade, and in that time he’s learned real-world strategies for financial success in real estate.