Buying or leasing a car might both allow you to leave the dealership in a shiny new vehicle, but these two options are fundamentally different ways to roll. We take a look at how leasing is different from buying, what this means in practice, and consider which option might be best for you.
What Is Leasing a Car?
When you lease a car, you pay to drive a vehicle for a period and then you return it or you may buy out your lease so you own the vehicle. At the end of your lease, you may need to pay fees for extra mileage or wear and tear.
Pros and Cons of Buying vs. Leasing a Car
Buying a car is comparable to buying a home. When you buy a car using an auto loan, you agree to pay off the cost of the vehicle, plus interest, over your chosen loan term.
PRO: You pay off the loan and then own the asset outright.
PRO: You can make any changes you like to the vehicle and use it however you want.
PRO: You have a wide choice of near-new and older car models.
PRO: You can customize your car however you want.
PRO: You know the auto loan fees upfront.
PRO: You can sell the car and get funds for your next purchase.
CON: Monthly payments may be higher than leasing.
CON: You may need to pay more maintenance as the car ages.
Leasing a car is more like renting a property.
PRO: Your payments may be lower.
PRO: You may be able to lease a vehicle you couldn't afford to buy.
PRO: Lower maintenance costs on new vehicles.
PRO: Newer vehicles will always be covered by warranty.
CON: You're paying only for the right to use the car for a set period.
CON: You need to buy the car at the end of your lease if you want to keep driving it
CON: You may need to pay excess mileage or wear and tear fees at the end of your lease.
Differences Between Buying and Leasing
Let’s take a closer look at what the differences between owning and leasing a vehicle mean in practical terms.
When you lease, you will never own your vehicle. The money you pay is a rental fee and doesn't give you a stake in the vehicle. At the end of your lease, you return the vehicle and walk away. But when you finish paying off an auto loan, the vehicle is yours to use or sell.
You may pay a down payment to both buy and lease a car but they work in different ways. An auto loan down payment means you pay part of the purchase price upfront to reduce your loan principal and increase your equity. Sometimes you may also put 0% down on an auto loan.
A lease down payment may lower your monthly payment but doesn't give you any equity in the vehicle. If you end your lease early, you likely won't get the money back.
You will typically pay less on your monthly payment for a leased car because you're only paying for depreciation, not paying off the total value of the car. Unlike a car loan, however, your monthly payments do not increase your ownership stake, or equity, in your vehicle.
While you will usually pay less each month to lease, over time it will cost you more because you keep paying the same lease payments, and your ownership never increases. You always have a car payment.
The lower up-front costs of leasing mean you might be able to drive a more prestigious brand or model than you can afford to buy. Meanwhile, buying a car means you can choose from a wide range of near-new and used vehicles, including classic cars or affordable older cars.
Maintenance and Reliability
Leasing a car means you're always driving a new, reliable vehicle. You can avoid the problems vehicles tend to develop later in life, and you will spend less on maintenance. Your dealer may even carry out the maintenance on a leased vehicle for you.
Leased vehicles will always have comprehensive warranties. Your dealer still owns your vehicle and is responsible for any serious problems that might develop. When buying a car, you may choose to take out an extended warranty to stay covered.
You will need to buy your vehicle if you want a vehicle you can customize to your taste, either with features and upgrades offered by the dealer or with aftermarket parts and add-ons. Lease vehicles come with standard specifications and changes are usually prohibited
Penalties and Restrictions
The terms of your lease will stipulate a minimum period you need to lease the vehicle for, and will often restrict your mileage and where the car can be driven. You will usually pay a penalty if you want to return a vehicle and exit your lease early.
You might face other fees at the end of the lease if your car has high mileage, excessive wear, or other damage. You might also be forced to exit your lease if you move out of state or need to commute to a different state.
Some auto loan fees might be rolled into your car payments, including an origination fee, conveyancing, and loan insurance, and you might be hit by a prepayment penalty if you want to pay down your loan early.
In general, however, these are more predictable costs than the fees you might face at the end of your car lease. You can also drive your vehicle as much as you like and wherever you please.
If you are leasing a car, you will not face the hassle of selling or trading in your existing vehicle if you want a newer car. On the other hand, if you buy your car, then you have the option to sell it and gain funds for your next purchase or use the equity however you want.
What to Consider Before Choosing to Buy or Lease
Leasing a car is fundamentally different from buying your own vehicle and is not for everyone. However, leasing can make a lot of sense if:
Auto prices are very high or rising rapidly
You only need a car for a limited time
You want a reliable car with no maintenance hassles
Owning and maintaining a vehicle is a bigger responsibility and monthly payments are often higher, but this comes with significant long-term advantages:
You will own more of your car over time and then own it outright
The longer you drive your car, the more you save
You are free to sell your car when you choose
Owning a car is a great choice if you are interested in taking responsibility for your finances and building wealth. Not only will you gain a valuable asset, but you’ll demonstrate your ability to plan ahead and think long-term.
Telcoe Federal Credit Union: Your Auto Loan Partner
At Telcoe Federal Credit Union, we know how important owning a car is to getting ahead. Whether you're looking to finance a new or used car, truck, or motorcycle, or even to refinance your existing vehicle, we help our members with:
Competitive low, fixed rates
Easy, quick approval process
Up to 60 days of no payments.
Click below to learn more about how we can help get you on the road today.