When it comes time to replace your car, you have a lot of choices to make: New or pre-owned? Sedan or SUV? Gas or electric? But perhaps the biggest decision you have to make is whether you will lease or buy your vehicle.
Both options have their advantages and disadvantages, and the one you choose depends on your preferences, needs and financial situation.
Buying a vehicle
With this route you’re either paying cash or financing the cost. Most buyers make an initial down payment and then a monthly payment. Eventually, buyers get clear ownership of their vehicles, with no liens on their title.
Leasing a vehicle
If you choose this path, you pay to use the car every month, plus a rent charge (which is similar in concept to an interest rate). At the end of a lease — usually two or three years — you can decide to buy the car at the price listed in your lease agreement or get a new one.
While monthly payments and up-front costs tend to be higher when purchasing a car, leasing can end up costing more, especially when factoring in that insurance requirements for leased cars are typically higher.
Buying vs. leasing: What’s the difference?
With car prices remaining high, you’ll need to decide if buying or leasing is right for you. Let’s break down the differences.
Factors to consider | Buying | Leasing |
Ownership | Gain full ownership and build equity over time | Do not own the vehicle and must decide at the end of the lease to return, buy or lease a new car |
Up-front costs | Higher monthly and up-front costs | Lower monthly and up-front costs |
Future value | Could recoup some of your initial investment | Any resale value goes to the leasing company |
Mileage | Drive as much as you’d like | Often comes with mileage limits, and you may face charges for excessive wear and tear |
Factors to consider when deciding to lease or buy a car
Now that you know the basic difference between the two options, you may be wondering which choice makes the most sense for your next car. Consider these major factors.
1. Cost
While monthly payments and up-front costs tend to be higher when purchasing a car, leasing can end up costing more, especially when factoring in that insurance requirements for leased cars are typically higher.
Still, leasing a vehicle could be right for you. Many new leased cars come with free maintenance plans, meaning you won’t be on the hook for costly repairs. And if you lease an electric vehicle (EV), you might be eligible for federal tax credits.
2. Credit score
Whether you buy or lease, your credit score matters. Leasing usually requires a higher score to get the lowest monthly payments. And while it may be possible to lease a vehicle with a lower credit score, it could leave you with higher monthly payments. Building a good credit score significantly improves your chances of getting approved for a car lease or loan and can lead to better interest rates and terms.
3. Driving needs
Leasing may make sense if you want a new car with the latest features every two or three years, need lower monthly payments and plan to keep your mileage low. On the other hand, if you have a long commute, love to take weekend getaways or are a road trip fanatic, buying a car may be the right choice for you since there’s no mileage limit when you own a car.
4. Vehicle upkeep
When you lease a vehicle, you need to carefully follow the maintenance schedule outlined in the owner’s manual. When you own a car, you have more control over what to repair and when. But with freedom comes responsibility. If something breaks or you’re in an accident as an owner, you’re responsible for any charges not covered by your insurance.
5. Long-term flexibility
Financing a vehicle ultimately ends with ownership, providing long-term stability and the option to keep, sell or trade the car. When you lease a car, long-term flexibility looks different. To get out of a lease, you have a few options:
Early lease termination
Lease transfer
Lease buyout or sale
Trade-in
Otherwise, at the end of your lease, you can choose to return, buy or lease a new car.
Navigating buying or leasing your next car
Both buying and leasing a car can have benefits and downsides. Having a car is a large expense, so you need to take your lifestyle and what you need from it into consideration before signing any contract. Weigh all the factors and carefully outline your budget as you map out the route to your next vehicle.
