Purchasing a car is generally seen as an expensive endeavor — hence why financial institutions, car dealerships, and vehicle manufacturers have worked hard to help develop several financing options. These financing instruments serve the key purpose of helping customers decide whether to lease vs buy cars they cannot afford to pay upfront.
Currently, there are three main methods that can be employed when it comes to purchasing a new or used vehicle. You can either pay the price upfront and obtain instant ownership of the vehicle, or you can sign up for a car loan or leasing contract, which takes a couple of months to fulfill. Several market studies on the topic of leasing vs buying a car have determined that, in the US, there is approximately $1.18 trillion in outstanding car loan debt; roughly 85% of all new non-commercial cars are purchased via a financing instrument.
Therefore, we can deduce that less than 15% of new cars in the US are purchased upfront — hence why it is essential for everyone to fully understand the differences between buying upfront, getting a vehicle loan or leasing a car, as well as getting to the bottom of whether is it better to lease or buy a car in the long run.
As such, this article aims to present all the facts concerning key differences between leasing and buying (a car) through a side-by-side comparison that includes data on ownership, up-front costs, monthly payments, termination, residual value, and more. The elements outlined below are also based on a series of car loan statistics, as well as the most recent data on financing, and leasing vehicles. Consequently, by the end of this article, readers should have an easier time deciding between the different methods of purchasing a new or used vehicle.
How Does a Car Loan Work?
Car loans are pretty similar to personal loans — the key difference is that personal loans can be used to purchase just about any product or service, whereas car loans can only be used for buying a vehicle.
The process that you need to go through tends to vary depending on your jurisdiction, yet most financial institutions try to keep it pretty straight forward. Hence, a car loan can be defined as a contract where the lender runs a credit check meant to determine your monthly income and your presumed ability to pay back the sum, according to most car buying guides. If the application is approved, the creditor will make the required transaction to purchase the vehicle on your behalf. The contract entails that the borrowed sum and the interest rate will be paid back in monthly rates.
It is important to keep in mind that the majority of personal loans are not secured; meaning, you do not have to guarantee your loan with collateral. In the case of vehicle loans, however, the collateral is the car. Failure to pay back the loan will trigger several extra fees. Following these extra fees, if you are still unable to pay the monthly rates, the creditor will seize your vehicle. This is one of the key differences between leasing a car vs buying it.
There are four main elements worth considering when you sign a car loan:
- The total price of the loan
This price includes the actual cost of the vehicle that has been negotiated at the dealership, plus the interest rate charged by the financial institution responsible for the loan. To put things into perspective, a study has shown that, in 2019, the average loan amount for new vehicles was approximately $32,187. In the case of second-hand cars, the average loan amount was $20,137. There are no major pricing differences between leasing vs buying a car when it comes to price.
The total price of the loan will be covered in monthly installments.
- The down payment for the vehicle
Most financial institutions will require a down payment for the vehicle. This down payment is a percentage of the total price negotiated at the dealership. For most loans, you can choose to pay as much as possible to help reduce your monthly rates and make the loan more affordable in the long-run, as outlined by many a new car-buying guide.
- The interest rate that you will be paying to the lender
Most vehicle loans entail that the debtor pays a monthly interest rate, which represents the profit of the creditor. The interest rate tends to vary based on several factors, including the price of the car, the size of the down payment, the term of the loan, and your credit score.
A recent study has determined that the average loan term for a new vehicle in the US was 69 months in 2019. Most creditors allow you to select a loan term based on your personal preferences. The shorter the loan term, the higher the monthly rates — and vice versa.
How Does Leasing a Car Work?
In the case of leasing, you do not gain property of the vehicle; rather you only rent it out for a specific period of time, with the option to purchase the car at the end of the leasing term, for a cost referred to as its residual value. In case you choose not to purchase the vehicle, then the car must be returned to the lessor once the contract expires. This definition should be enough to help you decide between leasing a car vs buying a car.
Nevertheless, there are several other advantages associated with leasing. For instance, users get the opportunity to drive more expensive and luxurious cars, which are covered under warranty for the entire leasing term. Similarly, the monthly rates associated with leasing are generally lower when compared to vehicle loans. It is important to keep in mind that the total price of the leasing contract is calculated with the vehicle’s value depreciation in mind during the car lease term.
Additionally, there are also several disadvantages worth keeping in mind when leasing a vehicle. For example, choosing to lease vehicles throughout your lifetime will result in a higher cost as opposed to simply purchasing cars. Similarly, at the end of the leasing contract, the vehicle must be returned to the lessor, in case a purchase option agreement is not signed. Upon giving the vehicle away, no equity is offered to the ex-user, which is yet another downside of car leasing.
Here are the main elements worth considering when leasing a vehicle:
- The capitalized cost of the lease
This cost includes the full price that you will have to pay in order to lease a vehicle. From this cost, the lessor will proceed to deduct the down payment. Hence, the remaining amount represents the monthly rate, alongside the lease rate. One recommendation is to compare the capitalized cost of the lease with the actual price that you would pay by purchasing the car in question when conducting your own research on buying vs leasing a car of your choice.
- The residual value of the vehicle
One of the main advantages of leasing a car is that, at the end of the term, you will have the option of purchasing the vehicle at its residual value. This term refers to the amount of money that the car will be worth at the end of the leasing period, taking mileage into account as well. This is one of the key differences when it comes down to that buy vs lease decision.
The lease rate acts as a monthly fee placed on top of the monthly rate of the lease itself. As such, it represents the profit of the lessor. There are several lease rate calculators available online that allow you to access approximate quotes for leasing vehicles.
Most leasing firms allow you to select your own lease term, starting from 12 months, all the way up to five years. This is yet another aspect worth considering when deciding whether it’s better to lease or buy a vehicle. When choosing the leasing term, it’s best to consider whether you are planning to buy the car at its residual value, as well as the time-frame during which you will be using the vehicle. The average lease term in the US is 36 months.
Most lessors impose a yearly or monthly mileage allowance for the car that is being leased. Going over this mileage allowance generally entails having to pay extra fees. In the US, the mileage allowance gravitates between 12,000 and 15,000 miles every year.
Leasing vs Buying a Car — Side by Side Comparison
So far, we have outlined the main aspects worth considering when buying or leasing a vehicle. Now, it is time for us to present a side-by-side comparison between these two popular methods.
- Gaining property of the vehicle
When you purchase a car, either by paying the price upfront or by signing up for a vehicle loan, the ownership of the car is instantly transferred to you. This means that you can do as you please with it, even selling it before paying off your debt as long as the credit is also legally transferred to the new owner. Do keep in mind that the lessor can repossess your car in case the monthly rates are not paid.
When you lease a car, the vehicle does not belong to you, but rather to the dealership or the lessor, depending on local regulations. Hence the car has to be returned once the lease expires, or else be purchased at its residual value. In case you fail to pay the monthly lease rate, the car will be repossessed by the lessor.
In the case of purchasing a car via a loan, you can expect higher monthly rates as opposed to leasing, given the fact that you are purchasing complete property over the vehicle in question. The monthly payments also include taxes, fees, and other forms of charges, such as insurance in some cases. Purchasing a car via a vehicle loan also entails several up-front costs, including the down payment and registration.
On the other hand, the truth about cars, when it comes to leasing, is that monthly rates are expected to be lower since the price that you are paying stands for the depreciation of the vehicles during the leasing period, alongside the profit of the lessor (the renting tax), and other fees. There are also several up-front costs worth taking into consideration when leasing, such as a security deposit that will be refunded at the end of the term, registration taxes, alongside the payment for the first month.
This article also includes a side-by-side comparison of the prices associated with both leasing and purchasing via a loan. This should aid in your decision on whether you should lease or buy a car.
- Early termination of the contract and car return
When purchasing a car via a vehicle loan, the automobile can freely be sold at any time. The proceeds from the sale can then be used to pay off the remaining debt.
However, this is not possible in the case of leasing since you do not technically own the vehicle. As such, the lease can be ended early, although this will entail several costs. If you can no longer afford to pay the monthly leasing rate, the car can be directly purchased by a third party from the lessor, thus facilitating an early termination of the leasing contract. This will also hurt you from a financial standpoint. Therefore the best time to lease a car is when you are 100% sure that you are able to pay the monthly rates.
Do keep in mind that, in the case of loan-based purchases, the car can be sold or traded freely. For leasing, the general procedure is that the car should be returned to the lessor once the term of the lease expires. Thus, you do not get to own any equity in the vehicle, which is yet another difference between leasing and buying a car.
- Customization, accidents, and wearing out the vehicle
When purchasing a car, you are free to customize it as much as you want, as long as the local legislation concerning vehicle customization is respected. This isn’t the case when you lease a vehicle since the car must be returned in its original condition.
A car that has been purchased via a loan can be crashed without any repercussions on the loan terms. This is a welcoming advantage in the buy vs lease car debate. Most buyers will proceed to repair the vehicle out of their own pocket, or via insurance money. For cars that are being leased, most lessors make it mandatory to sign an insurance policy that covers all the costs associated with an accident.
Wear and tear are also a highly-relevant factor worth considering. In the case of purchased cars, there is no need to worry about wearing out the vehicle, since it will only lower its resale value, yet have no impact on the loan terms. On the other hand, lessors will hold you accountable for excessive wear and tear, thus leading to extra costs.
Lease vs Buy — Cost Comparison
| 2019 Honda Accord LX, $24,650 MSRP, San Diego, CA |
3-Year Vehicle Lease |
3-Year Vehicle Loan |
| Monthly Payment |
$249 |
$688 |
| Down Payment |
– |
$2,000 |
| Up-Front Costs |
$1,499 (excluding tax, license, title, and dealer fees) |
– |
| Interest Rate |
0.0029 Money Factor |
4.65% APR |
| Residual Value |
$13,557 |
– |
| Mileage Limit |
12,000 miles yearly, 20 cents/mi |
– |
| Total Price Paid After 3 Years |
$8,964 |
$26,768 |
For the sake of this example, we choose the 2019 Honda Accord Sedan with continuously variable transmission LX, which is one of the best cars to lease.
As such, the table highlights the fact that monthly rates are considerably lower in the case of leasing a vehicle for a 3-year period. Similarly, the total amount paid is also lower in the case of leasing — still, there is no residual value for vehicle loans. Similarly, there is no residual value or mileage limit when buying a vehicle via a car loan, which is yet another key difference between car lease vs buy figures.
Also, the rates vary depending on a series of factors, including the price of the car that has been negotiated at the dealership, the monthly rate/interest fee charged and negotiated with the lessor, your credit score, the trade-in value of your current car, the loan/leasing term, etc. An exact quote can only be obtained once these variables have been decided upon.
Leasing vs Buying — New Car
New cars can be bought both via leasing, vehicle loans, and upfront payments. In this section of the article, we will explore the advantages and disadvantages of leasing and buying a car via a loan.
| Leasing Advantages |
Leasing Disadvantages |
| The possibility to get access to a more expensive vehicle |
You do not get to own the vehicle, and are therefore unable to sell, customize, or expose it to excessive wear and tear — a key element worth noting when deciding to buy or lease a car |
| Better financial planning |
If you wish to buy the car, it must be purchased at a residual cost |
| Low expenditure of capital on a monthly basis |
Mandatory taxes and more expensive insurance |
| Termination possibilities |
The requirement to properly maintain the asset |
| Opportunity to constantly change cars |
Little to no tax benefits |
| The leasing holder must only pay for using the car |
More expensive than purchasing a car in the long-run |
| Better liquidity of assets, since no downpayment is required |
Having to commit to the leasing contract until the term expires (another finance vs lease key difference) |
| A more reliable, powerful, and luxurious vehicle, provided that it’s new |
|
| Buying advantages |
Buying disadvantages |
| You get access to a new car that features the latest technologies provided by the manufacturer |
A higher monthly rate for vehicle loans, given the fact that you are purchasing complete property over the car, and do not have to return it |
| A more reliable vehicle and manufacturer warranty |
Considerably higher sales tax, as opposed to buying used cars. Hence, the question “should I lease or buy a car” comes down to how much you can afford to spend monthly |
| The possibility of getting incentives and special offers |
New vehicles lose 20% of their value once they are purchased by their first owner |
| Complete ownership of the vehicle — buyers are free to customize, wear out, sell or trade-in the car |
Your vehicle acts as collateral in the case of vehicle loans. Thus, it will be repossessed in case you fail to pay the monthly rates |
Leasing vs Buying — Used Car
| Leasing Advantages |
Leasing Disadvantages |
Buying Advantages |
Buying Disadvantages |
| No need to deal with the negative effects of depreciation, unlike new cars, since it is irrelevant when you lease a vehicle |
No ownership of the used vehicle |
No need to deal with the negative effects of depreciation once the car is driven off the lot |
Higher monthly rates when compared to leasing |
| Lower cost for accessing premium features or trim packages |
No ability to customize the car, so the answer to the question “is leasing better than buying,” is negative for those interested in tuning and customization |
Lower cost for accessing premium features or trim packages for used vehicles |
Lower liquidity, given the down payment and higher rates |
| Fixed monthly rates |
Losses cannot expose the car to excessive wear and tear |
Fixed monthly rates |
Higher interest rate |
| Better liquidity as opposed to buying |
Cannot ensure quality and reliability of the leased car |
Lower sales tax |
Cannot ensure quality and reliability of the purchased car |
|
Fewer options when choosing color, trim, and features |
No mileage limit |
Fewer choices when choosing color, trim, and features |
Bottom Line
Based on everything that has been outlined thus far, choosing whether it is better to lease or buy a car is an extremely complicated process that entails a thorough analysis of several elements, as highlighted in this article.
There are numerous advantages and disadvantages to both of these options. Therefore we recommend that future car buyers or lessees carry out their due diligence, while also negotiating with dealerships, credit agencies, and lessors for better rates. It is extremely likely that the lease vs buy debate will continue on for years, yet we can conclude that buying is better if you wish to keep the car for a longer period of time (and can afford to do so), whereas leasing is more suitable for those who want feature-packed cars, for a somewhat shorter term. Again, it all depends on your budget, to each their own.
No matter for which financing method you opt for, you should seriously consider getting the best possible car insurance in order to protect your investment.
FAQs
Is it better to buy or lease a car?
It’s best to purchase a car if you can afford the higher monthly rates and if you want to keep the car once the debt has been paid off. Leasing is more beneficial in case you want the car for a shorter term, can afford lower monthly rates, and you are not interested in customization. Giving an exact answer is only possible after a thorough analysis of the particularities associated with each potential car buyer or lessor, so the debate remains open.
Do millionaires lease or buy cars?
Most millionaires purchase their cars upfront (to no great surprise), without taking either a loan or a lease. There are times, though, when millionaires might lease; for instance, when they need a specific car for a shorter time frame. Yet, in the long-run, it’s still cheaper for them to just cough up the cash instead of paying interest fees, as they can afford it.
What’s better, to lease vs buy a car when you drive a lot?
If you drive more than the average American, buying is certainly the wiser choice here, granted that most leasing agents impose a limited yearly mileage, in an effort to preserve the car and protect it from excessive wear and tear. So, leasing is only recommended if you drive less than 12,000–15,000 miles annually.
