Leasing vs Buying a Car
Leasing can mean lower monthly payments and a new car every few years, while buying usually costs less over time. Here's how leasing works, the pros and cons of each, the fees and limits to watch for, and how to decide which suits you.
By Pond.com editors Updated 3 min read
Quick answer
- Leasing usually means lower monthly payments, but you don't own the car at the end.
- Buying costs more per month with a loan, but once it's paid off you own an asset and have no payment.
- Leases have mileage limits, often 10,000 to 15,000 miles a year, with charges for extra miles and excess wear.
- Leasing suits people who want a new car every few years and drive predictable, moderate miles.
- Buying and keeping a car for many years is usually the cheapest option over time.
When you get a new car, one of the first decisions is whether to lease or buy. Leasing often looks cheaper because of the lower monthly payment, but the total cost and the restrictions are very different. Here's how to compare them.
This article is general information, not financial advice.
How leasing works
A lease is a long-term rental, usually two to four years. Your payments cover the car's expected depreciation during the lease, plus interest (the money factor), taxes and fees. At the end, you return the car, buy it, or lease another.
How they compare
| Leasing | Buying | |
|---|---|---|
| Monthly payment | Usually lower | Usually higher with a loan |
| Upfront cost | Often first payment, fees and sometimes a down payment | Down payment, taxes and fees |
| Ownership | No | Yes |
| Mileage | Limited, often 10,000 to 15,000 miles a year | Unlimited |
| Wear and tear | Charged for excess wear at return | Affects resale value only |
| Customizing | Restricted | Allowed |
| Long-term cost | Higher if you always lease | Usually lower if you keep the car |
Leasing may suit you if
- You like driving a new car under warranty every few years
- You drive a predictable, moderate number of miles
- You want lower monthly payments
- You keep cars in very good condition
- You use the car for business and can deduct some costs (ask a tax professional)
Buying may suit you if
- You plan to keep the car for many years
- You drive a lot of miles
- You want to customize the car
- You want no payment once the loan is paid off
Costs to watch in a lease
- Mileage overage charges, often around 15 to 30 cents per extra mile
- Excess wear and tear fees at return
- Disposition fee when you turn the car in
- Acquisition fee at the start
- Early termination costs
- Gap insurance: often included, but check
Negotiate either way
- Negotiate the car's price (the capitalized cost) on a lease, just as you would if buying. See how to negotiate a car price.
- Ask for the money factor and residual value.
- Compare total cost over the time you'll have the car, not just monthly payments.
Common questions
Usually, but it can be expensive, because you may owe the remaining payments or an early termination fee. Options include a lease transfer to another person, if your leasing company allows it, or selling the car to a dealer or buyer who pays off the lease.
Most leases include a purchase option at a set price, called the residual value or buyout price. It can be a good deal if the car is worth more than the buyout price, or if you know its history and want to keep it.
It's the lease's interest charge, written as a small decimal. Multiply it by 2,400 to get an approximate interest rate. For example, 0.0025 is roughly 6%. Ask for it and compare it with loan rates.