Leasing vs Buying a Car: What’s Your Best Option

Last Updated on July 24, 2024

Choosing between leasing and buying a car is a major decision that should reflect your finances, driving needs, and future plans. After all, there’s plenty to consider like the costs, benefits, and potential downsides of both options. The process can be overwhelming, but this article will show you what you need to know and help you choose which one is best for your next car purchase.

Financial Considerations for Leasing

Leasing is similar to renting a car in that you get to enjoy a new vehicle without gaining ownership. In this case, you do so every few years. One perk that comes with a leased car includes smaller upfront costs, negating the need for a huge down payment. When compared to buyers’ auto loans, there are also lower monthly payments coupled with potential tax benefits. However, the flip side is that leasing sometimes involves higher insurance coverage, plus those end-of-lease fees. That includes charges for excess mileage or wear and tear. These fees can add up and should be factored into the overall cost of leasing.

Lower Monthly Payments

The average lease payment is typically lower a than car loan payment because you’re only covering the car’s depreciation over the lease term, plus interest and fees. On average, a monthly payment for a new car is around $730, whereas a loan payment would be around $570. That means drivers save at least $160 a month when opting to lease instead of buying. These affordable monthly payments make leasing more appealing in the short term and can make it easier to manage your budget, allowing you to drive a more higher-end vehicle than you might be able to afford outright.

However, while lower monthly payments sound appealing, they come with the caveat that you’ll never stop making payments if you continue leasing. Since you never actually own the car, the payments keep coming. From a long-term perspective, this approach could eventually prove to be more costly than buying. For instance, if you lease multiple vehicles over the years, the cumulative cost could exceed that of buying a single car and keeping it for a long time.

Upfront Costs

Most leases typically involve fewer upfront costs than buying. In many cases, car lease agreements require little to no down payment, especially for those with good credit scores. This can make leasing a more accessible option for those who might not have a large sum of money available for a down payment.

End of Lease Fees

After you finish the auto lease, you might face various charges, including those for extra mileage and wear and tear. Penalties for exceeding the mileage limits can be significant, ranging from 15 to over 40 cents per additional mile. Don’t find get blindsided by these costs. Instead, factor them in when deciding whether or not a lease contract is a good idea in the first place.

Financial Considerations for Buying

When buying, the down payment, interest rates, and other financing terms are all a significant financial commitment. Yet, unlike leasing, buying means higher monthly costs initially, but at the end of the loan term, you own the vehicle. In fact, a down payment represents about 20% of the cost for new cars and 10% for used cars. This initial payment can reduce the overall loan amount and influence your loan terms, making budgeting all the more essential.

The loan term and interest rates will vary based on your credit score and the lender’s policies. Therefore, you should shop around for the best financing deal and consider the total cost of the loan, including interest and other charges. Not every car buying service is the same.

Down Payment Requirements

In car buying, the down payment is typically larger than in leasing. However, this large down payment accomplishes a few things. For starters, you get to improve your chances of securing financing, especially if you have a lower credit score. Secondly, whatever you pay reduces your monthly payments by decreasing the overall loan amount. That’s helpful in the long run in case other financial obligations arise and for avoiding a long car loan. And lastly, you can potentially lower your interest rate. The lower the rate, the less cash you pay in the end.

Interest Rates and Loan Terms

Both interest rates and loan terms have a substantial effect on car buying, especially for a new car. A good credit score can help secure a lower interest rate, making the loan more affordable. However, longer loan terms often come with higher interest rates, increasing the total cost of the loan. Also, bear in mind that loan payments include paying off the entire purchase price of the vehicle, plus interest and other charges. 

You should use online calculators to compare different financing options and understand the full financial commitment.

Ownership

One thing leasing can not offer you is ownership. In contrast, buying a car means that once your loan is paid off, you own the vehicle outright, providing you with equity that can be used as a down payment for a new car or kept as an asset.

Resale Value and Depreciation

New cars lose a significant portion of their value as soon as they are driven off the lot. That’s why when purchasing a car, depreciation and resale value are key considerations to make ahead of time. Owners bear the full financial brunt of depreciation, which depending on what you hope to do with the vehicle, could prove to be a significant downside.

Lifestyle Factors to Consider

When leasing or buying, you also need to factor in your lifestyle. Here are a few essential areas to note.

Driving Habits and Mileage Limits

Leased vehicles generally come with a mileage limit, usually between 10,000 to 15,000 miles. Exceeding these restrictions could result in significant penalties, making leasing less suitable for high-mileage drivers. If you drive a lot, buying a car helps avoid these additional costs.

Customization and Personalization

When leasing, customization options are extremely limited. Leased cars must be returned in the same condition, which means any modifications need to be removed before returning the vehicle. Failure to do so could incur additional fees. Buying a car, on the other hand, allows for full ownership and the freedom to customize however you wish.

Flexibility and Commitment

How committed are you to owning the vehicle? Opting to lease a car involves committing to a fixed term, typically ranging from two to three years. If your circumstances change, you will face financial consequences for terminating the lease agreement. Buying a car provides more flexibility, as you can sell your vehicle at any time without incurring additional fees.

Assessing Your Financial Situation

What’s the current state of your budget? Evaluate your ability to make a significant upfront payment and handle loan installments. Keep in mind that your credit score impacts the terms and conditions of both a car lease and a car loan.

Benefits of Leasing a Car

If leasing is your preference, you’ll find numerous advantages. Access to newer models, warranty coverage, and a simplified trade-in process are just a few of the perks.

Access to Newer Models

For those who enjoy frequently driving the newest models, leasing is the ideal choice. Since these agreements often run for two to three years, you get to upgrade to a new vehicle regularly. That means you can always enjoy the latest technology and safety features without a long-term commitment.

Warranty Coverage

Warranty coverage stands as a major perk of leasing a car. Most leased cars come with a manufacturer’s warranty that covers significant repairs during the lease period. This means you can drive with peace of mind, knowing that any major issues will likely be covered, reducing the risk of unexpected repair costs and helping you save money.

Simplified Trade-In Process

Leasing offers a simplified trade-in process in contrast to car purchase. At the end of a lease, you simply return the car to the dealer, minimizing the hassle of selling or negotiating a price. This convenience can benefit those who prefer a straightforward process when it’s time for a new vehicle.

Drawbacks of Leasing a Car

Choosing to lease a car boasts some advantages, but there are also some disadvantages worth consideration. Major downsides include the lack of ownership, ongoing payments, and limitations like the excess mileage penalty.

No Ownership

Choosing to lease cars means you don’t own them and no equity is built. There’s no trade-in option either. That’s bad news for those who prefer to have an asset they can use as collateral or sell in the future. Additionally, leasing a car generally requires full insurance coverage, which can increase insurance premiums. Higher maintenance costs may also be incurred because new cars require more expensive labor and parts.

Continuous Payments

Continuous payments are required when leasing a car. Lease payments are ongoing, with no end to payments as long as you lease.

Restrictions and Penalties

Leasing contracts typically come with mileage limits, and exceeding these limits can result in extra charges up to 40 cents per additional mile. Moreover, any damage deemed beyond normal wear and tear at the end of a lease can result in additional fees.

Benefits of Buying a Car

Now let’s recap some of the pros that come with car buying. 

Building Equity

Gradually, car loan payments lessen the principal due, thereby increasing your vehicle’s equity. With each loan payment made, a portion goes towards paying down the principal, which builds equity in the car over time. This equity can be used as a down payment for a new vehicle or kept as an asset.

Unlimited Mileage

If you buy a car you get unrestricted mileage. That’s a significant advantage for those who drive long distances regularly.

Customization Freedom

Car purchase permits customization and personalization. You can make any modifications or additions to the car without worrying about violating anyone’s lease terms or incurring their fees.

Drawbacks of Buying a Car

With several advantages come some drawbacks. Let’s review. 

Higher Monthly Payments

Monthly loan payments on car loans are typically higher than lease payments because you’re repaying the entire purchase price of the car, plus interest. However, you end up owning an asset outright once you finish.

Depreciation Risk

Cars depreciate rapidly, losing significant value in the first few years. This means that the resale value of the car can be much lower than the purchase price, impacting your overall financial investment.

Maintenance Costs

Once the warranty expires, car owners are responsible for all maintenance and repair costs. This includes regular maintenance like oil changes and tire replacements, as well as any unexpected repairs.

Using a Lease vs Buy Calculator

If you’re stuck and unsure which route to take, one definitive way to decide between buying and leasing a car is doing the math. Various sites like Bankrate provide an online calculator to help you work out the numbers yourself and compare exact costs.

Government Auctions: An Alternative for Buying

For those who are certain buying is the better option, there’s a way to get quality, affordable vehicles without a trip to the traditional dealership. Government auctions like Municibid provide a cost-effective option for purchasing a variety of items, including used vehicles. These auctions are sales events where federal agencies or contracted companies sell government surplus and seized items. A diverse range of vehicles are put on sale at potentially lower prices than market rates. Some vehicles you won’t find in the normal market such as fire engines and police cars. Even better, the auction process is transparent with all items listed in advance along with their conditions.

How to Participate in Government Auctions

You can find these auctions taking place online, in person, or via mail-in bids. Registration is typically required to participate. After you do that, research the items of interest to understand their value and condition. Then decide how and for how much you want to make your bid.

If you want to find out which auctions are taking place in your area, then visit your municipality’s website. Surplus gets sold on the local and state levels. Here’s an example of items sold in New York and other items sold Texas.

Naturally, the items put on sale in your particular area will vary from other locations. However, you are not necessarily confined to your state or city. A school bus sold in Texas will feature an AC, but one sold in Maine may not. However, so long as the auction rules don’t dictate, you can bid on either item. The only caveat is that you will need to provide transportation for whatever you win.

Frequently Asked Questions

What are the cost differences between leasing and buying a car?

Leasing a car means lower monthly payments and no ownership, while buying a car involves higher payments but results in ownership.

What are the potential end-of-lease fees I should be aware of?

You should be mindful of charges for excess mileage, wear and tear, and disposition fees. All of this could prove to be more than you budgeted.

What are the benefits of buying a car?

Buying a car allows you to build equity, enjoy unlimited customization and mileage, and own the vehicle outright.

How can government auctions be an alternative for buying a car?

Government auctions can be a great alternative for buying because they offer cost-effective vehicles at prices significantly cheaper than market rates.

Conclusion

Before you pay upfront for leasing or buying, know which option works best in your favor. Leasing offers lower monthly payments and the ability to drive newer models, but it comes with restrictions and continuous payments. Buying a car involves higher upfront costs and monthly payments, but it allows you to build equity and enjoy unlimited customization and mileage. Ultimately, the best decision is one that aligns with your lifestyle and financial goals. 

If you’re ready to buy, then check out the surplus offered through Municibid. You can find vehicles like pickups and sedans, but you can also buy unconventional rides like fire trucks, ambulances, and much more.