Should I Finance or Lease a Car?

This is a question you might have asked yourself at least once. Deciding whether to buy or lease a vehicle is a big decision, so you want to be sure to make the right choice. The thing is, the “right” decision depends on each person’s individual circumstances. So, is it better to lease or buy a car? To help you decide, here are the pros and cons of leasing.

Pros of leasing a vehicle

• Lower monthly payments because instead of paying for the entire value of the car, your monthly payments only cover the vehicle’s depreciation (plus rent and taxes) over the lease term.
• Less cash is needed up front because a lease often requires a small or no down payment. (By comparison, you may need up to a 20% down payment for a vehicle purchase.) With a lease, you’ll typically pay the first month’s payment, taxes, title and registration fees, and other fees. Generally speaking, the up-front costs are less when you lease.
• Lower repair costs because most repairs will be covered by the manufacturer’s warranty. In some cases, the manufacturer will cover maintenance costs. Be sure to review the lease agreement for details.
• No resell hassles because when the lease is over, that’s it, you’re done. The car becomes the leasing company’s responsibility.
• You can enjoy that new-car smell more often because lease terms are usually short. So, if you move from one lease to another, you upgrade to new cars that sport the latest technology and safety standards.
• You can drive in style because lower monthly lease payments mean you can afford a higher-end vehicle. Some people may have a hard time qualifying to finance their dream car, but with a lease, that dream could become a reality.
• With a buyout option, you can buy the leased vehicle if you fall in love with it, or if the vehicle is worth more than the buyout option price. If your lease includes a buyout option, you’ll face this decision at the end of your lease. Here is NerdWallet’s advice on when you should consider buying the leased vehicle.

Cons of leasing a vehicle

• You can’t build equity because you don’t own the vehicle. When you buy a car, it’s an asset that you can continue to drive, trade-in, or sell. From a financial standpoint, the leased vehicle is not an asset, it’s a liability. Consumers who lease cars for many years may end up paying more than they would have paid by financing a vehicle.
• You have to limit your driving to avoid exceeding the milage limit. This limit usually ranges from 10,000 to 15,000 miles per year. If you exceed this limit, you’ll have to pay excess milage fees, and they can add up fast. Also, if the vehicle is under the mileage limit, you don’t get a credit for those “unused” miles.
• Excess wear and use could cost you because you may have to pay fees for any damage or repairs the lease dealer considers to be excessive. Plus, excess wear and use can reduce the car’s market value. This could affect your decision if you were thinking about buying the vehicle after the lease.
• Early termination fees could cost you even more than excess wear. Generally speaking, you could have to pay the early termination fee plus the difference between the lease balance and the vehicle's value. Check your lease contract before you sign to find out what options you would have if you needed to end the lease early. Here is Kelley Blue Book’s advice on returning a lease vehicle.
• Lease contracts can be complex, so be sure to study the lease contract carefully and ask questions to make sure you understand your obligations.
• You could pay higher insurance premiums because the leasing company may require that you purchase full coverage (comprehensive and collision) to provide insurance for the car in case of an accident, theft, vandalism or other damage.

And the winner is…?

As you can see, there is no clear-cut winner in the leasing vs. financing battle. The best you can do is study the pros and cons, decide which ones matter the most to you, and move forward from there.