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10 Main Differences Between Leasing and Buying a Car

Last updated 05/15/2024 by

Erica Gellerman
You’ve decided it’s time for a new car and you’re excited about the options. But with the average price of a new car being over $35,000, you need to find the best way to pay for it. But, first, you have to decide whether you want to lease or buy your new car. What are the main differences between leasing and buying a car and which option is better? Well, each has its benefits and drawbacks.
We’ll walk you through everything you need to know to ensure you find the right solution for your needs.

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Differences Between Leasing and Buying a Car

The main difference comes down to who owns the car. When you buy a car, you own it and can choose what to do with it. When you lease it, however, you’re renting it for a specific period of time. Monthly payments are typically lower but you’ll need to follow rules that the dealer has created.
Those are the obvious differences. However, there are other factors you’ll want to consider when deciding whether to lease or buy a car. To help you understand the main differences between the two, we’ve listed five pros and cons of leasing a car.
Here is a list of the main benefits and drawbacks of leasing a car.
  • Lower maintenance costs.
  • Lower down payment and monthly payments
  • Buyout option at end of the lease.
  • Get a new car every few years: because lease terms are generally 36 months, leasing the car gives you the ability to always drive the newest model.
  • Sales tax benefits.
  • It’s more expensive.
  • Mileage caps.
  • Early termination fees.
  • You don’t own anything.
  • Wear and tear fees.

Benefits of leasing a car

  1. Lower maintenance costs: most car leases are 36 months and most new car warranties last for at least 36 months. So, most maintenance issues that come up during the lease should be covered by the warranty.
  2. Lower down payment and monthly payments: lease payments are based on the car’s depreciation over the lease period, rather than the purchase price of a car. Because of this, your down payment and monthly payment will be less when you lease a car.
  3. Buyout option at end of lease: if you do end up loving the car you’ve leased and you’d like to purchase it, most leases offer a buyout option. Think of it as an extended “try it before you buy it” option.
  4. Get a new car every few years: because lease terms are generally 36 months, leasing the car gives you the ability to always drive the newest model.
  5. Sales tax benefits: in most states, you only have to pay sales tax on the total cost of your lease payments, rather than the price of the car. This can be a big saving when compared to the sales tax of purchasing a car.

Drawbacks of leasing a car

  1. It’s more expensive: though the monthly payments on a lease are cheaper than on a car loan, it’s more expensive to lease a car. When you make payments on your loan, you’re building equity in the car. Once you’ve paid the loan, you have an asset that you can either continue to drive or sell.
  2. Mileage caps: leases usually come with very strict mileage limits (from 10,000 – 15,000 per year). If you exceed this mileage limit, the fee on the overage can be very high.
  3. Early termination fees: if you need to end your lease early, it will be expensive. You could be stuck paying an early termination fee plus any remaining depreciation.
  4. You don’t own anything: at the end of your auto lease, you don’t own anything. So, if you decide to lease another car, you’ll need to have the cash available to make another down payment.
  5. Wear and tear fees: because you don’t own the car, you’ll be on the hook for excessive wear and tear fees when you return it.

Is it better to buy or lease a car?

There’s no right or wrong answer that works for everyone. It depends on your individual preferences and financial situation.
Here are six questions that will help you decide what’s best for you:

1) Do you care more about your monthly cash flow?

Since you’re mainly paying the depreciation on the car during the lease term, rather than the full price of the car, your down payment and monthly payments will be lower when you lease. You’ll also be driving a car that is under warranty, so your maintenance costs will be lower.

2) Are you most concerned with saving money?

It’s cheaper to buy a car in the long run. While your monthly payments will be lower with a lease, you won’t own the car once the lease is up. If you’ve taken out a loan to purchase a car, you’ll own the car once you’re done making payments. You can continue driving it, trade it, or sell it.

3) Do you have bad credit?

There are great leasing options available, but you’ll need good credit to qualify. If you have bad credit, it will probably be easier to buy rather than lease a car. You may, however, need to pay a higher interest rate.

4) Will you be using the car for your business?

When you drive a car for your business, you can take a tax deduction. Leasing the car can result in a larger tax deduction. If you lease the car, you’ll be able to write off a portion of the monthly payments. If you buy a car, a portion of the interest on the loan is tax deductible.
See IRS Publication 463 for more details.

5) How long do you plan on owning your car?

If you like driving the newest model car and you’d prefer to get a new car every few years, leasing is a good option.

6) How will you use the car?

Do you have kids or a dog and enjoy taking long road trips? Because of the mileage and wear and tear expenses of a lease, you’ll likely be better off buying a car rather than worrying about getting hit with big fees at the end of the lease term.

The bottom line

There’s no one-size-fits-all solution for everyone. Leasing may be better if you’re concerned with keeping your monthly payments low and you like driving a new car every few years.
But buying might be better if you’d prefer to own the car once you’re done making the payments and you don’t want to be stuck with excessive fees.
If you’ve decided that buying is the right decision for you, be sure to explore your loan options before making the purchase. Use our auto loan comparison and review tool to get personalized loan rates and read customer reviews.

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Erica Gellerman

Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, and Business Insider.

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