Buying vs. Leasing a New Vehicle

Liz Opsitnik
February 28, 2012
Buying vs. Leasing a New Vehicle

Once you’ve narrowed down your new-car choices, it’s time to explore ownership options. The decision to buy or lease your next new vehicle depends on many factors. You should take into account depreciation, monthly payments, loan or lease length, mileage restrictions, down payment, interest rate and the total amount you’ll pay to finance your next new vehicle.

This guide will walk you through the pros and cons of financing and leasing to help you decide which one is right for you.

Pros of Buying a New Car

Many car shoppers choose to buy instead of lease because they’ll own the car when it’s paid off. Those who pay cash own it from the get-go. If you lease, you don’t own the car when the lease ends. When you buy, you can keep the vehicle as long as you want or trade it in for a different vehicle. You can also modify the vehicle and you’re not limited to mileage restrictions. There’s more freedom to do what you want when you buy.

Cons of Buying a New Car

When you buy a new car, it loses value the minute you drive it off the lot. That makes it difficult to predict what your vehicle will be worth when you’re ready to sell it or trade it in. If you decide to trade or sell, and you owe more on the car than it’s worth, it will be harder to get out of the vehicle because you’ll have to come up with the extra cash.

Lengthy loans are another downside to financing a new car. To keep monthly payments affordable, many shoppers stretch the loan out to five, six or even seven years. Keep in mind that you’ll usually pay more in interest with a longer loan than if you choose a three- or four-year loan.

Big down payments are another common reason some shoppers prefer leasing over buying. To keep the monthly payments more budget-friendly, many people put about 10 to 20 percent down when buying a car. On a $25,000 car, that means $2,500 to $5,000. If you’re not able to make a big down payment, leasing might be better for you.   

Car Lease Pros

People often lease new cars because they can get into a much nicer vehicle for a lower price. Because you’re only paying for the future depreciation of that vehicle, leases generally cost less. For example, instead of paying the entire $20,000 purchase price, you’d only pay a percentage of that if you lease. This percent is based on the car’s predicted future value, which is also known as the residual value.

Leasing is also a good option if you don’t want to worry about maintenance. Since most leases expire before the car’s warranty is up, many shoppers enjoy the fact that leased cars won’t need expensive repairs.

Leasing also makes it easy to get a new car every few years. If you get bored easily, or like having the latest and greatest technology and features, leasing might be a good choice for you.  

Car Lease Cons

To lease a new vehicle, you generally need a good credit score, though this is also true of new-car financing. If you know your credit score is less-than-perfect, ask the finance manager what score they require to lease a new vehicle. If you won’t qualify because of your credit score, it may not be a good idea to apply for the lease, as each application for credit can lower your score.

Auto leases have mileage restrictions. With most leases, you can choose your mileage in the lease agreement. Common mileage restrictions for auto leases are 9,000, 12,000 and 15,000 miles per year. You’ll pay more for extra miles, so decide how many you will actually use. Make sure you have enough, because if you exceed your mileage restrictions, you’ll be charged a fee. For example, the Nissan Murano’s lease incentive includes 12,000 miles per year, which is common, but the fee for going over is $0.15 per mile. These fees will be charged at the end of your lease when you turn the vehicle in. If you rack up lots of miles each year, leasing probably isn’t for you.

Another downside to leasing a new vehicle is that you don’t build any equity. You’re essentially renting the vehicle from the leasing company. When your lease is up, you can buy the car, lease another car or buy a new or used car. When you turn it back in, the dealership will sell it either as a certified pre-owned model or a used model. Cars that come off lease are a common source of used-car inventory for dealerships.  

Running the Numbers

When you’re deciding whether to lease or buy, sit down with a calculator and run the numbers. With a lease, you’ll have to give some sort of down payment. Even zero-down lease offers require you to cover fees like tags and title.

How much do you have saved up for the down payment? How much can you spend on your monthly payment? If your budget is tight, leasing might be better because the monthly payments are generally less than if you financed that same vehicle.

How long do you want to keep this vehicle? If you only want to commit to a new car for a few years, leasing may be a better option, but if you want to keep it until the wheels fall off, buying is better.

Explore all your options before you decide to lease or buy. With so many new-car payment options, there’s one that will fit your budget.