Experian’s State of the Auto Finance Market quarterly report tells us that in the fourth quarter of 2020, over 26% of all new vehicles were leased as opposed to purchased outright.
It can be tempting to lease a car. For the same monthly payment you can often get a much nicer vehicle. Or, going the other way, you can get a lower monthly payment on the same car when you lease instead of purchase it outright.
If that sounds too good to be true, you’d be right. Leasing a car isn’t that simple and financially doesn’t usually come out ahead when comparing it to buying the car outright.
Table of Contents
- Advantages of Buying a Car
- The Freedom of Ownership
- No Mileage, Condition, or Modification Limits
- The Possibility of No Monthly Payment
- Disadvantages of Buying a Car
- Advantages of Leasing a Car
- Disadvantages of Leasing a Car
- Is it Better to Lease or to Buy a Car?
- Recommendation: Buy Used and Pay Cash
Advantages of Buying a Car
Ask anyone who owns a car and they’ll probably tell you it’s a mixed bag of both advantages and disadvantages.
Let’s take a look at some of those pros and cons and talk about whether they outweigh the pros and cons of leasing a car. Here are some of the advantages of owning your car.
The Freedom of Ownership
If you pay for your car in cash – or once the payments are finished – you own your car outright. No one can tell you what you can do with it or how to treat it.
There’s no giving it back at the end of a term and having the dealership scour it for scratches or other damage. If you damage the car, the only person you have to answer to is yourself and/or maybe your partner.
It’s yours to do with it as you please. You can sell it, drive it into the ground, or give it away.
No Mileage, Condition, or Modification Limits
Another benefit of buying a car is that there are no mileage limits. Leases almost always come with a limit on how many miles you can drive during the lease term.
If you own the car you don’t have to worry about keeping track of miles. And you don’t have to worry about keeping it in tip-top shape so that you’re complying with lease terms.
Lastly, you can modify the car as you choose. Pinstriping, mag wheels, loud mufflers; the choice is yours and yours alone. And that kind of freedom is nice to have.
Next, let’s go over some of the disadvantages of buying a car instead of leasing one.
The Possibility of No Monthly Payment
If you pay cash for a car you’ll have no monthly payment from day one. However, even if you finance a car you’ll eventually pay it off and then can drive for many years with no payment at all.
Having no car payment is a huge relief on your budget. The average car payment for a new car is $563. This means a two-car family is shelling out over $1,000 a month in car payments alone.
Disadvantages of Buying a Car
While I am personally a fan of buying a car over leasing one, there are some disadvantages of car ownership that leasing a car can eliminate.
More Money Out of Pocket at the Start
For instance, when you’re purchasing a new car as opposed to leasing one, you’ll often (although not always) have a higher down payment.
In addition, you’ll likely have a higher monthly payment as well. When you’re comparing leasing vs. buying the exact same car, buying will result in more money out of pocket, both upfront and each month.
However, eventually, you’ll pay the car off and have years of payment-free driving. You’ll also get money when you sell the vehicle, so buying does tend to be cheaper overall.
Advantages of Leasing a Car
While many personal finance experts aren’t a fan of car leases (cue Dave Ramsey yelling “It’s called ‘fleecing’, not ‘leasing!’”), a car lease does have some advantages.
And the first one is an attractive one; a lower monthly payment.
Lower Monthly Payment
If you’ve got your mind set on a particular vehicle and are trying to decide whether you should buy it or lease it, leasing will likely win if you’re strictly concerned only about the monthly payment.
For example, I looked up lease prices in my area for a 2021 Toyota Camry LE. I can lease this vehicle for $239 per month after putting $3,000 down.
However, if I were to buy this car with the same $3,000 downpayment I would pay $358 per month. Leasing this car would mean less of an impact on my budget right now.
Why Does Leasing have Lower Monthly Payments?
Instead, lease payment amounts are often determined by the amount of depreciation it’s estimated the car will take during the term of the lease.
Auto experts take the capitalized cost (i.e. price) of the car and subtract the estimated residual value (estimated value at the end of the lease) of the car.
They divide that amount by the length of the lease and then add taxes, interest, and fees to come up with the estimated lease down payment and monthly payment amount. Here’s a full explanation if you’re interested.
Hint: If you’re thinking about this math like I am, you may have already figured out that it’s probably going to cost you less to lease a car that depreciates slower and holds its value longer than other cars.
It’s worth noting that many people lease not because they want a lower monthly payment, but because it means they get a nicer vehicle for the same payment.
In other words, they use leasing in order to be able to afford a nicer car than they could afford by purchasing it.
Beware of purchasing a vehicle that’s easy on the eyes but too big for your budget, even if you can afford the lease payment.
No Need to Resell
Another convenient benefit of leasing cars is that you don’t need to resell them when you are ready to move on.
Instead, you just turn the car into the dealership and walk away. Or you can walk straight to the sales floor after turning in your lease and pick out another new car to lease.
You get to go from car to car consistently without having to worry about the hassle of buying and then reselling them.
You Get to Drive New Cars
Another nice thing about leasing cars is that if you’re leasing a new car regularly, you always get to drive nice, new cars.
Driving new cars is nice. They look nice. They feel nice. And there’s a certain status symbol that comes with driving new cars.
If these features are important to you, you may prefer to lease your cars instead of buying them so that you can take advantage of the ease and other benefits.
However, there are important disadvantages to leasing cars as well.
Disadvantages of Leasing a Car
While we’re not sharing a large list of leasing disadvantages, the ones we are sharing can make a large impact on your budget.
No Ownership Potential
Likely the biggest disadvantage of leasing a car is that you are basically renting the vehicle. There’s no ownership potential after the lease term is completed.
You give the car back to the dealer. You may have the option to buy the car at the end of the lease term, but you’ll still likely pay what they call “residual value”. This is the original purchase price minus the depreciation that took place during the lease. Here’s more about that.
When you buy a car, you own the car in full when your payments are completed. This leaves you with a (hopefully) equitable vehicle you can sell or trade-in and get some cash for a down payment when it’s time to purchase another vehicle.
Or you can keep the car a few more years and drive it payment-free into the ground.
Potential for Additional Costs
Leasing a car also leaves you at risk of possibly having to pay costs over and above what you pay for your down payment and monthly payment on the lease.
For instance, most car leases come with pretty strict mileage limits. Most of the lease options I found online limit you to between 10,000 and 12,000 miles per year. That’s between 27 and 32 miles per day. Considering the average commuter drives 30 miles round trip to work, that doesn’t leave a lot of extra miles for anything else.
If you drive more than what your lease contract allows, you’ll pay somewhere in the neighborhood of five cents up to 20 cents per extra mile that you drive.
In addition, leasing contracts have strict condition terms as well. If you turn the car in at the end of the lease with any damage not considered “normal” wear and tear, you’ll pay additional money for the damage as well.
Here is what Toyota considers “excessive damage”. But always be clear on what your specific lease specifies before signing.
So, now that you’ve got an idea of some of the advantages and disadvantages of buying a car vs. leasing a car, which should you choose?
Is it Better to Lease or to Buy a Car?
Let’s look at two simple scenarios. Buying a $30,000 car, driving it for two years, and then selling it vs leasing the same car for two years. We will assume a 0% interest rate for both buying and leasing just for easy math.
- New: $30,000
- Down payment: $3,000
- Monthly payment: $450 (60 months)
- Value of the car after 2 years: $20,700 (average car depreciates 31% in the first two years)
After two years the buyer can sell the vehicle for $20,700. They still owe $16,200 on their loan, which will leave them with $4,500 in their pocket after the sale.
They will have spent a total of $13,800 in down payment and monthly payments but the $4,500 back at the sale will bring their total out-of-pocket costs to $9,300, or $387.50 per month.
- New: $30,000
- Down payment: $3,000
- Monthly payment: $280
- Value after two years: $20,700
Assuming all goes well the leasee turns the car in even-steven. They get nothing, they owe nothing. At the end of two years, they will have spent a total of $9,720, or $405 per month.
And they have the added risk and stress of driving over the allotted mileage amount or something happening to the car. It’s likely there will be additional fees, but even if there aren’t, it’s could still be more expensive to lease.
If you’re not a person who is extremely careful about the care of your vehicles, or if you regularly drive a lot of miles, leasing a vehicle might not be for you.
However, you aren’t limited to choosing to either buy or lease a brand new car.
You do have another vehicle purchasing option.
Recommendation: Buy Used and Pay Cash
My personal favorite way to buy vehicles is to buy a quality used vehicle and pay cash. When you buy used vehicles, someone else has already paid for a good bit of the depreciation of the car or truck.
In fact, it’s estimated that new cars depreciate between nine and ten percent the moment you drive them off the lot. That’s true for both purchased and leased vehicles.
But when you buy used, you let someone else take that gut punch to the bank account.
Also, the car is yours. Not the bank’s. Not the dealership’s. Just. Yours. No one can tell you what to do with it, how much to drive it, or how to take care of it.
You don’t have to have that dreaded meeting where you drive into the dealership to turn in the car at the end of the lease and they interrogate you about every scratch and dent.
And lastly, you don’t have to worry about monthly payments. Personally, I have to say that this is my favorite part of paying cash and driving used cars.
For me, the wonderful feeling of driving something new and shiny is far outweighed by the lack of a car payment listed on my free monthly budget spreadsheet.
Call me cheap if you want, but I love driving and owning my paid for used cars because it means more money in my bank account.
But again, you have to do what’s right for you when it comes to whether you choose to buy or to lease a car. If you still want to buy new, at least buy during the best times to buy a car.
While leasing a car can save you money upfront when comparing it to buying the same car, leasing does have many disadvantages that can end up costing you in the end.
Moral of the story: Do some serious research and soul searching before you sign up for a car lease.
Consider your budget, your bank account, and your driving habits. Decide just how much control you want a car dealership or leasing company to have over what you do with the car you drive.
And if you’re looking for the most economical choice, get yourself a quality used car you can pay cash for.
Have you ever leased a car? If so, how did that work out? Feel free to share your thoughts and experiences in the comments section.