Getting a new set of wheels can be exciting. Updated safety technologies, bumper-to-bumper warranty, and that new-car smell are all enticing.
But behind the shine of a freshly painted sedan and the promise of a fuel-efficient engine that’ll save you money on gas lurks the unfortunate reality of a new car: they’re expensive.
Not only is getting a new car a costly purchase, but it’s also a complicated one. Between researching, haggling with a dealer, getting the right car insurance, and coming up with the money for a down payment, it can be a lot.
Even before all that, you’ve got a significant financial decision to make: Should you lease or buy a car?
Leasing vs. buying a car: What's the difference?
Before deciding whether to buy or lease a car, let’s break down the difference between the two:
What is leasing a car?
Leasing a car is when you pay to drive a vehicle for a set time period, usually between three and five years. Instead of paying the full price, you pay the difference between the car’s new value and its anticipated residual value (what the dealer expects the vehicle to be worth at the end of the lease).
Leases generally have lower down payments and monthly payments. However, at the end of the lease, you must turn the car back over to the dealership – you can’t sell it or trade it in (though you can buy it off the dealer at the end of the lease if the contract permits). You’re also limited to a set number of miles during the lease.
What is buying a car?
Buying a car is more straightforward. You can either pay cash upfront for the full price of the car, or you can finance it through a lender. The car dealership can find a lender for you, but you’re also able to seek out loans from banks and credit unions on your own.
If you take out a loan, you’ll need to make a down payment and monthly payments, including interest, until the car’s paid off. You can keep driving the car for as long as you like, and you’re free to sell it or trade it in whenever you want.
Here’s a quick breakdown of what it’s like to lease vs. buy a car:
|Who owns the car||The leasing company or dealership, unless you exercise your option to buy at the end of the lease term.||If you pay cash, the vehicle is yours from the start. Otherwise, the lender owns it until you’ve paid off the loan.|
|Down payment||The required down payment when leasing is usually smaller than when financing (and sometimes, there’s no required down payment at all).||The required down payment when buying is usually larger than when leasing.|
|Monthly payment||Typically less than monthly loan payments.||Typically more than monthly lease payments.|
|Upfront costs||May include a down payment, security deposit, registration fees, taxes, and other costs.||May include a down payment, registration fees, and taxes.|
|Restrictions||Mileage limits and restrictions on most modifications.||Freedom to drive and customize as much as you’d like.|
|End of term||Must turn in the vehicle at the end of the lease; no trade-in value. (Note: you can sometimes buy the car at the end of the lease.)||Keep the vehicle after it’s paid off; free to sell or trade in when you want.|
|Credit||Builds credit if the leasing company reports lease payments to the credit bureaus; typically requires a higher credit score to get approved for a lease.||Builds credit if the financing company reports loan payments to the credit bureaus; can typically get a loan with a lower credit score than is required for leasing.|
Pros of leasing a car
Here are a few advantages of leasing a car over financing one:
- Lower payments: Because you’re only paying for the vehicle during the few years you’ll drive it, you don’t have to pay the full sticker price. That means you’ll have a smaller down payment (sometimes not required at all!) and lower monthly payments.
- Spending power: If you’ve had your eye on a higher-end model that you can’t afford to finance, talk to the dealer about the cost to lease it. Because leasing yields cheaper monthly payments, you may be able to splurge on a higher trim level or more luxurious model. Leasing a new car every few years also means you’ll regularly have access to improved fuel economy and more advanced safety and entertainment tech.
- Warranty and maintenance: When you lease a vehicle, the car is under warranty during the entirety of your lease. Many dealerships also offer free car maintenance for leased models during the contract, so you don’t have to pay for things like oil changes and tire rotations.
Cons of leasing a car
Leasing a car sounds pretty great, but it’s also got its drawbacks:
- No ability to sell: Some drivers are attracted to the lower monthly payments of a lease, but remember, you don’t get to keep the car at the end (unless you decide to buy it). That means you can’t pocket any cash for selling the vehicle or trading it in. You’ll also have to immediately lease or buy another car at the end of your lease — no freedom from monthly car payments.
- Restrictions: Lease agreements have mileage restrictions, typically between 12,000 and 15,000 miles a year. When you turn the vehicle in at the end of the lease, you’ll have to pay a fee for every mile you drove over the agreed-upon limit. You’re also restricted from modifying the vehicle.
- Higher credit score requirements: It’s more difficult to lease a car with a poor credit score than it is to finance one.
Need to boost your credit score before buying or leasing a car? The Chime Credit Builder card can help. See how one Chime member (and proud Mustang owner) used Credit Builder to turn her life around.
Pros of buying a car
Still not sure if leasing vs. buying a car makes more sense for you? Let’s break down some of the advantages of buying a vehicle:
- Easier financing: Most drivers with decent credit can usually qualify for a car loan. Even if you have bad credit, lenders may be willing to work with you – just plan to make a larger down payment and pay more in interest. If you have enough money in your savings account, you may be able to pay for a used car out of pocket — no financing necessary!
- No monthly payments down the road: Once you’ve made your last car payment, the car’s officially yours. You can drive it as long as you’d like without monthly car payments. Getting rid of a car payment may add flexibility to your monthly budget.
- Freedom to drive: When you own a car, you can drive it as much as you’d like without mileage restrictions. Cross-country road trips, daily commutes, joy rides out in the country – nothing’s off the table.
In need of a new daily driver but don’t know where to start? Here’s how to save money for a car.
Cons of buying a car
While buying a car is generally cheaper than leasing in the long run, it can have its disadvantages:
- Loans, interest, and your credit score: Unless you can pay cash, you’ll have to take out a loan. This means you’ll be paying interest on top of the price of the car. If you miss a payment, your credit score will drop.
- Depreciation: Cars are a bad investment. In fact, you shouldn’t think of them as an investment at all. Unlike when you buy a house and sell it years later, you probably won’t make a profit when selling your car. Cars lose value (depreciate) quickly in their first few years.
- Higher payments: Lenders typically require a larger down payment for buying a car. Because you’re paying off the full cost of the car, your monthly payments are also likely to be larger than if you were leasing. If you have a tight budget, a higher monthly payment might discourage you from financing.
Should you lease or buy a car?
Whether you should lease or buy a car comes down to your finances, your needs behind the wheel, and how you like to drive. For many drivers, buying makes more financial sense – and car sale data shows that drivers understand this. Less than 20% of drivers chose to lease last year.2
Why does buying make sense for most drivers? When you buy a vehicle, you’ll usually save money in the long run. You may reach a point where you no longer have to make monthly payments. And when you’re finally ready to upgrade, you can sell the vehicle and pocket the earnings.
Plus, you don’t have to worry about mileage restrictions. You can also shop for a used car to keep prices down.
Does leasing a car ever make sense? Of course! If you’re not bothered by mileage restrictions, leasing a car is great. Leasing also makes sense if you only need a vehicle for a set amount of time, like if you accept a temporary job in a new location and only need a car for that timeframe.
Plus, the lower monthly payments of leasing might be enticing if you have a tight monthly budget.
Leasing vs. buying a car: It depends on you
Deciding whether to lease vs. buy a car depends on your situation. Think about how much you drive, how much you have saved toward a down payment, how long you’d be willing to drive the same car, and how high of a monthly payment you can afford.
And remember: You don’t have to buy (or lease!) a new car. You can save a lot of money by shopping for a used vehicle as long as you do your due diligence to ensure it’s a wise investment.