Leasing vs. Buying a Car

When it’s time for a new vehicle, consumers have two main choices; Leasing or buying. There is no wrong or right answer here. The better option may depend primarily on your particular circumstances. As we will explain, the type of vehicle you choose may also help with your decision.

Buying vs. Leasing: Overview

When you are at the dealership there are three main options, two of which involve leasing.

Purchase

The first option is to purchase the vehicle. You can either pay cash, or use a downpayment and finance the vehicle. If you finance, you add to your purchase price the amount of loan interest over the life of that loan. If you are unable to pay cash and plan to finance, leasing is worth exploring. Both financing a purchase and leasing mean that you may not have any equity in the vehicle at certain times during the time you have the vehicle.

Lease Deal From The Manufacturer

Many leases are offered from the manufacturers. These are typically pretty fair deals and have been created by the manufacturers because they know that math works well for buyers and for them.

Lease Deal From A Third-Party

Sometimes leases are arranged by the dealer through a third party leasing company. Be aware that not every vehicle fits the lease framework well.

Think of a lease as a long-term rental. Typically 39 months. You drive the vehicle while making monthly payments, and at the end you can either turn the car in, or you usually also have the option of buying it at a price set when you originate your lease.

Read our full recommendations on the Best Auto Loans here.

The Pros of Buying / Why Buying is Better Than Leasing

• Possible shorter loan duration, depending on down payment made
• Possible equity in the vehicle
• Flexibility as the owner to sell or trade
• No mileage limit
• Possible income tax incentive if buying an EV

If you pay cash, or use a large down payment and then you have a short-duration loan, let’s say 36 months, you will own the vehicle in the sense that you have equity in it. You will be able to sell or trade it for more than you owe. This puts you in a sound financial position. However, not everyone has a budget that allows for that option.

Buying does offer you flexibility. You can sell the car or trade it in any time you like. You can also modify it, if you want to. Say you own a Subaru WRX and want to put a chip in it to make it seem faster. Or you have a Jeep Wrangler and want to add a lightbar and some larger tires. That type of modification or upgrade is an option for you if you own the vehicle, not if you are leasing.

At some point, the loan is paid off and you own the vehicle, free and clear. You can then gift (or sell) the vehicle to a family member, or you can use its value when it is time to buy new.

The Cons of Buying

• Possible long-loan duration, if you can't afford a sizable down payment
• Depreciation of the vehicle
• Upkeep and maintenance for an older vehicle can add up over time

If you purchase the vehicle and use a small down payment and a long-duration loan, let’s say 72 months or more, you will never really have much equity in the vehicle until it is paid off. Under normal market conditions, basically every year for the past century but two, a vehicle depreciated dramatically the minute you sign the purchase agreement. It becomes a used car at that instant. A drop in value of about 20% was typical. So, if you buy a $25,000 Honda Civic, the moment you take the keys and drive off the lot, it becomes a used $20,000 Honda Civic. And you haven’t even gotten it home yet.

Over the next few years, the vehicle will continue to depreciate. At the 39 month mark, you may still not have paid enough in principal to your lender to have positive equity. In other words, the vehicle may be worth less than you owe. In this situation, you are no better off financially than if you had simply leased. In fact, you may be worse off if you owe a lot more than the car is worth.

It’s pretty common for us to understand what ownership means, but many of us fail to remember that we don’t really have any true “ownership” until we have paid more for the vehicle in principal than we may owe on a loan. And the market will stabilize. For nearly every year in the modern era used cars depreciated until they were eventually worth less than the cost of towing them away. Setting aside classics and exotics, your car is not really an asset in the sense that it holds any value over time.

If you own a car and plan to keep it “forever” figuring it is the better financial move, please visit our Car Talk Community page and read the dozens of posts each day by sad owners with cars that are costing them a fortune to fix. “Broken fitzer valve! Third time!” “Dealer says I need a completely new flux capacitor and it is going to cost more than the car is worth!”

Exaggerations aside, your author tracked the 100K mile costs of two of America’s top-selling vehicles, the Honda Accord and Toyota Highlander. The Highander cost $14,029 in repairs and maintenance and the Accord cost $7,684 over 100K miles out of pocket. Roll those numbers into a budget for a car being financed for 72 months and the whole “I’m making money by not leasing” argument starts to seem a bit less convincing.

The Pros of Leasing

• Lower monthly payments possible
• Manufacturer warranty in place
• Potentially low maintenance costs as the car is newer
• Purchase option possible at end of lease

There are many pros to leasing, which is why it is such a popular choice for drivers. Nearly all of the pros to leasing are related to financing. The general idea is that if you lease a car you will enjoy a lower monthly payment. You won’t gain equity. When the lease ends you give the car back. However, most leases have historically included a purchase option at lease end. So how can you lose if the vehicle actually does accrue equity while you lease?

Leases also work very well for those who use a vehicle for business and who are reimbursed for the cost of a vehicle. As long as the miles driven are more or less equal to the miles granted by the lease, things are usually very predictable. However, leases are not just for business vehicles. Here are three specific scenarios where leasing can often work well for a person in need of a new vehicle.

Newly Employed

When a person first begins a career, a new vehicle is often a wise choice. Being on time every day and not missing work for any reason is step one toward success in the business world. Show up. That means you need a reliable ride. Furthermore, if you only have five or ten days per year in personal and vacation time, how many of those days do you want to burn dealing with a broken down old beater? Wouldn’t you rather be at the beach sipping a pina colada than sitting in a repair shop’s waiting room drinking coffee out of a machine?

There is a financial angle here as well. While many (most) new jobs in any profession pay an entry-level wage, it is likely that in three years you will be making more money. Possibly a lot more money. A lease works well in this situation. A new person starting in the workforce needs a reliable ride now, has an income to pay the lease, and sees that in a few years a better car may be attainable. If not, buy out the lease and finance the payments when the lease ends. It’s hard to see how the young person in this scenario loses, as long as they stay employed and make regular payments.

Students Commuting To College

Similar in many ways to a person starting in the workforce, a college student who commutes from home needs to be at the campus reliably. The well-maintained handed-down parents’ vehicle is always a first choice. However, if that vehicle is a minivan or an SUV, the cost of fuel is going to be a big problem. As might repairs.

A new, affordable, fuel-economical, reliable, safe vehicle like the Toyota Corolla Hybrid is an ideal choice for a college commuter. Leases typically last about 39 months. That’s most of college. If you're living at home and commuting, the chances are the drive distance is relatively short. Otherwise, living on campus makes more sense. Short commutes typically work well financially with leases.

When the college program ends, the car can either be purchased and financed, or if a new job’s salary allows for it, a new lease or new purchase might be a good option. By leasing in college or when one starts a career, the person bets on themselves to be in a better financial situation in a few years. Which is almost always the case in these two scenarios.

Retired Second Car

The attractive parts of leasing are that the vehicle is hassle free since it is a fixed cost of ownership, and it is also a good deal when the person leasing isn’t planning to drive a lot of miles. This scenario fits many retired people’s situation quite well. Many are on fixed incomes, and if a lease fits that budget it can serve as a low-cost way to have a car that won’t accrue many miles. In addition, a second vehicle for retired folks may fit the model, even if a pricier, fancier vehicle is the primary ride and used for most of the miles.

Electric Vehicles

Those who are considering an electric vehicle should look at leasing as an option. There are multiple reasons why leasing works well with electric vehicles. It isn’t just about dollars and cents.

EVs are rapidly evolving. When the Chevy Bolt first launched five years ago, it didn’t have standard DC Fast charging capability. Nobody today would even consider a battery-electric vehicle without this feature. The range of the first-generation Nissan Leaf was under 100 miles. Today, EV fans turn up their noses at any EV that isn’t capable of three-times that range. Our point is that EVs are rapidly evolving. What is pretty nifty today may well seem out-dated in 39 months.

One particular advantage of buying an EV is that most (GM and Tesla excluded) come with a whopping $7,500 federal income tax incentive. It is intended to make EVs more affordable. However, the person who owns the vehicle needs to have $7,500 in tax liability for that fiscal year when the car is acquired to qualify for the incentive. Not all drivers do. For those who can’t take advantage of this subsidy, a lease may work well. Many manufacturers discount the lease car’s price. It is a way to make the math work in your favor.

There have also been some pretty scary recalls related to EVs. Both Chevrolet and Hyundai have had to recall huge numbers of EVs due to battery defects. Leasing allows you to avoid the worry of a battery issue later in the vehicle’s ownership.

Most leases are written for roughly the same period that a new car is fully covered under its warranty. For many brands such as BMW, Jaguar, Hyundai, Volvo, VW, Toyota, and Jeep, the vehicle’s maintenance costs are also included for most of the lease period. What that means is you don’t need to budget for any costs of ownership aside from the lease cost, insurance, and energy (fuel). The car is covered during the ownership period for the most part. Even if maintenance is not included, for the first 39 months, those costs are pretty low. Near zero for EVs.

The Cons of Leasing

• No equity accrued while leasing
• Mileage restrictions
• Less flexibility as the car does not belong to you
• Very hard to get out of a lease, once you are in one

Those who are dead-set against leasing (and there are many folks who are) generally provide two reasons why leases are a really bad idea. Here are the two scenarios as explained by an anti-lease activist we will call Mr. Jenkins. Let’s hear him out and then analyze the stated problem;

1. “My cousin’s friend’s mother leased a car once. She over-drove the miles granted by the lease and at the lease end she owned a lot of money!”
2. “Any dummy knows that you have no equity after the end of the lease. Only a fool would pay for a car the way they pay for housing or a phone.”

Mr. Jenkins isn’t wrong about scenario one. If you don’t stick to the plan with a lease there are consequences. However, since nearly every lease includes a purchase option at lease end, his cousin’s friend’s mother didn’t have to pay any penalty at lease end if she opted to buy the vehicle. Which she could immediately trade in for a new vehicle or finance and keep herself. Did she walk home after turning in her leased car?

Like scenario one, there is some wisdom to Mr. Jenkins’ second warning. When you lease a car it is, in effect, a long-term rental. You don’t lease with the intent of having any equity in the vehicle. However, do folks who buy and finance a car have positive equity after 39 months? Or have they simply been slowly digging their way out of an auto loan hole since the day they took ownership?

In almost every year of the past century, a new vehicle devalued about 20% on the day it was sold. It then continues to decline in value every day from that point forward. The sad fact is, those who finance for more than five years (60 months) almost never enjoy positive equity during their ownership. At 39 months, most owe more on the car they drive than they have in equity. The term used to describe this is “being upside down on a loan.”

There is one real con of leasing. If you don’t like the vehicle, you are more or less stuck with it. There are some ways to get out of a lease. But none of them are pretty. Leases are built to make it very difficult for you to exit the lease. Particularly in years one and two. If you lease the Acme Glutton four-row SUV and immediately regret it, you are going to have a long 39 months of vehicle ownership.

One small con to leasing your author has experienced more than once is worth mentioning. The dealer that is required to handle your lease-end buyout, if you opt for that choice, could not be less happy to see you. You are a bothersome part of their day, and they will “get to you when they can.” Don’t expect them to run your paperwork to the RMV or help you in any way beyond how they are required under their franchise rules. You are not making them any money on the day you show up to buy out that lease. Plan on a day of hassles if you opt to buy out a lease and perhaps you won’t have a bad experience.

Should I Buy Used Instead?

While buying new or leasing is made more difficult by inventory shortages today (2023), buying used has never been such a bad deal. Many vehicles one to three years old are now selling more used than they cost new. We asked a Mazda dealer why that is. He explained that it presently takes him from one to three months to get a customer a new car. However, a used car is here on the lot, ready to drive home. He explained that some buyers need a car today. They are willing to pay more than the price of that brand new model to drive home a car the day they visit the dealership.

Alternatives to Buying or Leasing

More and more work-from-home employees no longer need to commute on a regular basis. A poll conducted recently by Consumer Affairs found that one in four drivers are considering going without owning or leasing a vehicle of their own in the future. That is a big shift in Americans’ habits. Public transportation, rideshare, and walking were the top alternatives. However, scooters, e-bikes, and conventional bikes were also options many of these folks listed as alternatives to having their own vehicle.

Our Recommendations

Car Talk’s Editor-in-Chief, Jamie Page Deaton, recently did a comparison of the costs of buying and financing a new affordable car vs. leasing, vs buying used. Check out her easy to understand math that points to leasing as being the most affordable way to drive that car in today’s market. Jamie points out she was a sociology major, so you won’t have any flashbacks to high school trigonometry when reading her example. Leasing isn’t for everyone, but if you slogged your way this far down into the story, you must either be considering it or trying to bore yourself to sleep. We hope it was the former.

Read more on the Best Time to Buy a Car here.

Read more on How to Buy a Car here.

Read more about Buying a Car here.