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Is It Better To Buy Or Lease a New Car?

If you’ve ever gone car shopping, you may have come across the option to lease a new car.

On the surface, a car lease seems too good to be true. You get to drive home in a brand new car for a lower monthly payment than if you got a loan to buy the car. Then, in two or three years, you have the option of buying out the lease and keeping the car or trading in for another new car. What’s not to like? Why wouldn’t it better better to lease?

Car leases are a subject of great passion for a number of financial writers. Ask these guys whether it’s better to buy or lease a car, and most will look you straight in the eye and say: “never ever lease a car!”

In most cases, I agree. But not always. (More on that to come.)

So why do most people agree that it’s better to buy rather than lease? The logic behind the conventional wisdom is simple: When you lease a car, you don’t own it. You have no equity. Your monthly payments disappear.

OK. So what? Who needs to own a car? What if you just want to drive it, not worry about maintenance or ownership, and just pay for that luxury?

If that’s how you feel, then leases will be attractive. You must simply realize that:

  1. Car leases are a luxury and
  2. you will pay for that luxury.

I can recommend leasing to somebody who is debt-free, financially successful, and can afford the luxury. Perhaps that person is savvy enough to know that by investing money she would’ve spent on a car, she may come out ahead when that money earns a good return in the stock market. (Here’s a calculator from SmartMoney.com to help you figure that out.)

Over the long run, it is more expensive to lease a car than to buy one. The only way you can change this calculus is if you buy a new car and trade it in every three years or so, in which case leasing may save money. (But realize that by buying new and trading in frequently you are burning up TONS of money, too.)

Also, a lack of equity is only one downside to a lease. Let’s look at the other pros and cons of car lease: 

The Upside to Leasing

Brand New Car: Leasing is about luxury and convenience. You get the luxury of a new car and the convenience of not having to worry about maintenance. That’s not to say you can go two years without an oil change, but because the car is new, you hopefully won’t have to worry about any major repairs.

Lower Monthly Payment: In most cases, the monthly payments on a lease are less than if you get a loan to buy the car at normal interest rates over three or four years. Keep in mind that most leases do require down payments equivalent to those required if you’re going to buy.

The Downside to Leasing

No Equity: As I mentioned above, you never own anything when you lease. Although leasing may seem less expensive over the next two years, in the long run you’re going to pay because you’ll always have a monthly payment.

Mileage Limitations: If you drive a lot, a lease is not for you. Dealers make money on leases because they collect your lease payments and then can resell the car as a two or three-year old certified used car. But the more miles on the car when you turn it in, the less a dealer can sell it for. Most car leases will charge something like 12 cents for each mile you drive over a certain limit. Most leases set a cap between 12,000 to 15,000 miles per year.

Excellent Credit Needed: Leases require top-notch credit. Although you can get a car loan even with bad credit, that’s not the case with a lease.

No Damage or Customization: The dealer will charge you for any excessive wear-and-tear on the leased car when you turn it in. That means dents or dings or interior damage from smoking or pets. It also means you can’t customize a leased car.

It Can Be Hard To Get Out of a Lease: If you buy a car and six months later lose your job, you always have the option of selling it.

With a lease, it’s more difficult. You can’t just end the lease early…at least  not without harming your credit. Some sites like Lease Trader have created networks to broker a secondary market for leases, but it’s a limited market, so don’t count on having the option.

It’s Complicated: Understanding how leases are priced is more complicated than understanding a sale. I didn’t even fully understand them when I worked at a car dealership and I was selling them!

Lease prices depend, in part, on:

  • Capitalized cost — similar to the initial price of the vehicle.
  • Term
  • Mileage allowance
  • Your credit
  • Money factor — This is the confusing one. The money factor is similar to an interest rate; the lower, the better. A lease money factor is a very small number such as .00315. Multiply the money factor by 2,400 to get something you can understand as an interest rate. In this example, 7.5%.
  • Residual Value — The car’s value at the end of the lease. A higher residual value can lower your monthly payments, but make it harder to get out of the lease if needed. A lower residual value means higher monthly payments but a lower buy-out option at the end. This will also make it easier to sell the lease or trade-in the lease mid-term.

Lease or Buy: How to Decide

When it doubt, buy, don’t lease, your next car. Keep in mind that according to Cars.com, 80 percent of people buy their cars. You won’t be alone.

Used cars make the most financial sense, but if you must buy new, commit to owning the car as long as you can. There are a few exceptions:

  • If you’re debt-free, successful, and like the idea of a new car with minimal maintenance and are able and willing to pay for that convenience. In other words, know what you’re getting into. It’s all about conscious spending. If you have the money and spending it on a car lease makes you happy, go for it.
  • If you plan on investing a lump sum of cash that you would’ve spent on the car.
  • If you use your car for business and deduct car depreciation as a business expense, leasing may make more sense than buying. Consult your tax advisor first.

Before you leave your opinions on the buy or lease debate in the comments (and I hope you do), remember there are always exceptions. Maybe, for example, you only need a car for two years and don’t want to worry about selling it when you’re done. And in some cases, in-demand used cars are worth so much at the end of a lease, lessees actually come out ahead! (Don’t count on it though.)

So…what say you? Do you think it’s better to buy or lease a car? Let us know in a comment.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. In full disclosure, my husband and I have two cars, one owned (paid in full) and one leased, so I can see both sides of the financial picture.

    We have a great deal on our lease, at $199/month with nothing down and nothing due when we return it. At that price, your implied cost over 10 years is about $24,000. Buying the same exact car brand new has a sticker price in that same price range before taxes (which probably cancel out most negotiations). Admittedly, after a few leases over 10 years, you have no equity or residual value, but we also have no maintenance costs under the terms of our lease, so that’s 10 years of not paying for brake tune-ups, oil changes, or significant repairs.

    I’m not saying that a lease is a perfect answer, due to some of the other downsides already mentioned in the article, not to mention there’s no guarantee at the end of your lease that you’ll be able to find another deal in that price range. It’s also assuming you’d otherwise be looking at a brand new car. However, I do think that when you shop around and find a good price, a lease could be a decent financial option. That’s no different than any other purchase – shop smart and run the numbers before locking yourself into any big purchase/contract.

  2. good article. Im actually going to sign a lease here in the next day or so. I am self employed though and can write off 75% of the montly payment since I use it for business 75% of the time. I need as many deductions as I can get. If I didnt have my company I would buy my cars.
    Brad

  3. My boyfriend leased a car at the very start of our relationship before things were serious enough for him to consult me on major financial decisions. While I would have said no!!! to the car lease, he did get a “lease to own” deal and the monthly payments for the last 3 years have gone toward the cost of the car if we buy it at the end of the lease. Buying the car will be more expensive than if we just bought an older used car like I want to, but he is paranoid about used cars (his mom bought some real lemons when he was a kid) and it wasn’t worth the constant money/car fights and he’s agreed to live on the bare minimum for the next few years as we pay off student loans and a car loan. Certainly not ideal, but he picked a good car we’ll have for years and we’ve saved up enough for the loan down payment that our monthly payments won’t increase.

    • David Weliver says:

      You bring up a great point Keisha about how emotional these decisions can be.

      You say your boyfriend “…is paranoid about used cars (his mom bought some real lemons when he was a kid)”. Those kind of memories would totally make someone biased towards buying new or leasing in a way that others might not understand.

  4. Great article David!!

    Last year I was contemplating whether to purchase or lease an Acura TSX. I ended up purchasing because I felt it is was the best financial decision for me. Although my payments are higher than if I would have leased, I believe owning a car will save me the most money long-term. For example, I will save on monthly payments once my car is paid off. I will have equity in case of an emergency and not to mention Honda is proven to make reliable and long-lasting cars, so I don’t anticipate many repair bills. Overall, I believe purchasing is the best long-term decision.

  5. Thank you for responding to my e-mail and also posting this article! Like I wrote in the e-mail, I’m only 20(still transitioning from being a teenager to an actual adult lol) I am currently working part time, soon to be full time expecting to make 60K and I’m still driving my first car, which my mom got for me. I’ll be graduating from trade school in two months and I thought what would be a better graduation present for myself than a new car? Didn’t know whether it was better to lease or finance a car, but now I know that I am going to go with financing! My fiancé leased a car when we were about 16 or 17 and looking back I think he’s crazy! I told him he should have financed then he could still have the car. Another question I have is what % of the car price should somebody consider saving up to use as a down payment? I was thinking if I financed a $14,000 car it would be a big help to put down $7,000. My fiancé’s mother is opinionated and doesn’t think I should get new car and says why wouldn’t I want to be payment free? I currently don’t pay any bills, but will be moving out in three months and by then I’ll be working full-time, what is your opinion on this? Should I wait another year to get a new car or should I just spread my wings and get into the real world? Any input would be great from everybody :)

    • Kat,

      As someone who is 25 and still driving the car my parents bought for me in high school, I say keep you first car for as long as you reasonably can (i.e. it’s in good condition and you’re not pouring tons of money into repairs). You never know what’s going to happen in life and what unexpected costs might pop up, especially this early in setting out on your own. I graduated with absolutely zero debt from college, but had a sudden loss of income for six months that I was able to pull through without any outside help because of my additional savings and reduced monthly costs from a lack of any car payment. So, if you can, wait it out for awhile and see where you stand in 6 months to a year.

      That said, if (or when) you decide to get a new car, I suggest buying a good quality car that you know will last you for quite a while. There is absolutely nothing wrong with buying new, especially if you can’t really vet the quality of a used option, but I suggest a hefty down payment (as much as you can reasonably afford) and financing a small remaining portion to build your credit. Hope this helps!

      • My car runs good, I suppose, but has major window problems and the A/C doesn’t work right. Also it has the loudest gas smell, but other than that it gets me from A to B. I was thinking that I would save up until at least April, pay off my student loans, and then get a car. But then again I was thinking about waiting because I am about to move out for the first time and I have no idea what that is going to bring me. I’m pretty good about researching things before I do them so I was going to go with a used Kia Rio with not too many miles. My step-dad has always been telling me I should get a secure credit card to build up more credit, I have no idea what that is. Reading this article again along with your response, I think I actually will wait at least a year or two until everything in my life is solid. Thank you for your input!!!

        • Kat,

          You need to get your car fixed, especially if you are smelling gas, that can be dangerous if it is fuel leak. My rule of thumb is to keep a car until it needs a repair that is more than the car is worth. That is the time to dump the car and get a new car. So use kbb.com to figure out what your car is worth (trade in value) and then see how much it is to fix your A/C and the gas smell. If the repairs are more than your car is worth, then skip the repairs & trade it in on another car.

          As David pointed out, leasing really only makes sense if you can afford the luxury. It also really only makes sense if you are getting a luxury car like a Porsche, Mercedes-Benz, BMW, etc. that you only want for a year or two because it allows you to have a luxury car for a lot less than buying. If you are looking at Kias, then you should try to buy it and own it as long as you can so that you can get your finances in order over the next 5+ years. I also would not buy a new car, but look for low milage (<20k miles) certified pre-owned cars. The way cars are engineered and built these days, 20k is still basically new. It will save you $5-6k and if it is certified pre-owned it will come with a warranty for major repairs. Also, DO NOT buy an extended warranty that the dealership offers! It is a waste of money because they are usually only good for 3-5 years and up to 50k miles, and cars these days really don't run into problems until 50k + miles.

          As far as financing goes, it depends on what rate you get. If it is low (<4%) then it is better to finance most of the car since it really is not costing you much in interest and it will free up more money for you to invest or spend on all of the expenses that come with a new career (wardrobe, furniture, rent, etc.).

          Also, a secured credit card is a card where you pre-pay money ahead of time into your account and can only spend up to that amount (you can't borrow money and then pay like a normal card). It is basically like a debit card or gift card, but it gets reported to the credit bureaus and builds your credit. They usually have high fees and are for people with bad credit or no credit.

  6. I’m not a big fan of buying a new car at all. Definitely like paying cash for used (but dependable) cars.

  7. To buy a used car is a definately more beneficial and during these financial times it is more wise to do so.

  8. It really depends on what kind of car(s) you are driving and how often you trade in cars. Leasing makes sense if you plan on getting a new luxury car every 1-3 years. Buying makes sense if you plan on keeping the car for the working life of the car (5+ years).

    If you “must have” the newest Porsche, Lexus, BMW, or other high-end car at any given time, then leasing is for you. If you are going to trade in your car every 2 years anyway, then you have already decided to make payments forever, so why not make the lower payment, avoid high up-keep costs, and not worry about having to trade in or sell the car?

    However, if you are like most everyone else, and you plan on driving the car until it falls apart, then you should always buy and buy slightly used certified pre-owned. The rent-to-own pitch is a classic sales trap, just like rent-to-own TVs don’t make sense. Even if you buy a new car that is not high-end, like a Ford or Honda, buying is the better deal. Unlike high end cars, economy cars depreciate much faster, so the leasing terms are worse.

  9. Another good option is buying a lightly used car (2-3 Years Old). If you aren’t in a hurry, then you can often get a great car at an used car price.

    Chase Miller

  10. Leasing is definitely tricky, but it’s a good option for some people.

    Last year, my boyfriend’s car completely broke down, and mine started to have trouble. We decided to junk his out, put all the money we had saved (for buying a car) into fixing up mine for him to drive, and then we leased a new car for me to drive for no money down.

    I did a lot of research when it comes to leasing, and found a couple of really useful rules:

    1. A down payment on a lease is NEVER necessary, and you should NEVER give any money to a dealer up front for a lease. A lease is a form of financing, but it is NOT A LOAN. You do not save money by paying it off faster. You will pay a fixed amount of money over your lease term, and that down payment is just to lower your monthly payment. If you have $3000 for a down payment, just put it into a savings account to pay your lease out of for a while.

    Reason being: Most leases come with a built-in ‘gap insurance’ so if your car gets totaled before the lease term is up, you won’t have to pay for the rest of the lease. However, that means if you put down $3000 at the start of your lease, and your payments are $200 a month, that $3000 was 15 months worth of payments that you paid for for nothing. You won’t get it back.

    The only reason the car dealerships try to get a down payment out of leases is for the up front cash, and the fact that they count on people not understanding how leases work. If they tell you that you NEED to pay a down payment, walk away. Find another dealer. If they’re calling it a security deposit because your credit isn’t good enough, you shouldn’t be leasing anyway.

    2. Don’t negotiate the monthly payment. Negotiate the cap cost of the car. If you bring down the total price of the car, it may naturally bring down the monthly payment, but more importantly, it brings down the price you’re going to pay in the end. There are plenty of ways for the dealership to make the monthly payments look really low while still screwing you in the long run.

    3. Really take into consideration how much you drive. If you live 10 miles from work, it’s REALLY difficult to keep a car under 10,000 miles a year. I lived 14 miles from my work, negotiated to get 15,000 miles per year, and with a few road trips, I was having a really difficult time staying under that. Luckily, I only live 3 miles from my job now, so I have PLENTY of miles for road trips.

    4. Insurance. My lease requires a pretty hefty insurance policy with a $500 deductible. I went from paying $60 a month for my Jetta, to $180 for my Mazda.

    But, I feel that my leasing experience has been pretty positive. Here’s what I got:
    2012 Mazda 3 – minimal options.
    I get 15,000 miles per year.
    I didn’t pay a single penny the day I drove off the lot (or for the next 30 days).
    My monthly payments are $215.

    I don’t plan on keeping the car at the end for the 42-month term, but if I do, the buy-out will be $9000 and good luck finding a 4-year old Mazda 3 with 60,000 miles on it for under that price.

  11. Hi David excellent article.
    Till Now I did not have any car. Now since few days I am thinking to have one. I have 3 option. used car, new card or lease. my friend suggested me to lease a car as you will have new car every 3 years and low monthly payments. I told him that I have one option to buy used cat 70K miles and 2006 Honda Civic EX in 8000 dollars. He told me that in most case you can drive 120K miles on any good car after that you will have lot of problems and eventually you need to sell that car or junk it. If you drive 10000 mile every year you will end up using 50000 miles in 5 years then after you have to sell or junk that car. now In lease, i will be having $100/month Honda CIVIC 2012 model. Finally I am agree to lease it.

    Now I have some questions!!!!

    1.I am not sure that after 2 year where will be my job. My job is safe in NY but lets see I get good salary and I need to move in other state what will be the situation if I lease the car?
    2. On lease, Dealer will give me 12000 miles per year, actually I don’t use car much, I think I will use 5000 miles a year. in this case what is the best thing- lease the car or buy a car?( I guess Buying is good deal)
    3.My friend suggested me that after 5-6 years if you want to sell any car you will loose 50% of original price but If i used less mile then i can get more resell value right?

    What do you think on these questions?

    It will be helpfull to me to decide if you reply ASAP.

    Thank

    Jignesh

    • David Weliver says:

      If there is any change you will be between jobs and/or will have trouble making a lease payment in the next 3 years, I would NOT lease. Given your situation, if I were you I’d go with the used Civic…seems like a good pick. Good luck.

  12. We just leased a Nissan Leaf because the payments are equal to our monthly gas bill+$36 and it was only $300 down after tax rebates We kept my husband’s paid-for ’97 Subaru as back-up so we still have a paid for car when the lease runs out yet get to drive a new car for 39 months without worrying about maintenance. We needed the fixed, known costs especially with the purchase of our new home next year. We see no cons to this. Are we missing something?

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