Exploring your options: Is it better to lease or buy a car?

Almost everyone dreams of the day when they have a car of their own — to drive where you want and when you want, and to finally have full control over the music. When you get closer to buying a car you find that there are a lot of choices. Are you going to get a used car or a new car? 

If new, what can you afford? What make and model do you want? What about the color and features? And once all that is figured out there’s one more choice — is it better to lease or buy a car?

There are advantages to buying a car and advantages to leasing a car. Which one works best for you depends on your own situation and goals. In this blog, we’ll go through some of the key differences so you can feel confident when making this financial decision.

What does it mean to lease a car vs. buy a car?

A leased car is like a long-term car rental. A dealership or leasing company will rent the car to the lessee (you) for a number of years in exchange for you making a monthly lease payment. The lease deal can be for a new or a used car, but most leases are for new vehicles. 

Leases usually come with some perks like free or discounted maintenance, but they also come with restrictions like mileage limits. The biggest difference with leasing versus buying is that you don’t own the car when you lease. 

Buying a car is a little more straightforward because if you buy it, it's yours. If you have the funds you can pay for the car upfront and own it outright. 

For many people, cars are expensive. That’s why some people take out a car loan. With a car loan, you usually pay a down payment and/or use money from the trade-in of an old car. Then, you can take out an auto loan for the remaining balance. The loan will have an interest rate that will depend on your credit score. Each monthly payment will get you a little bit closer to owning your car. 

To get the best offers in either a lease agreement or a loan term, it helps to have good credit. 

Is it better to lease or buy a car?

We’ve already talked about some of the differences between buying and leasing a car but to really understand which is better for you, let’s look at the advantages and disadvantages of leasing and buying. 

The pros of leasing a car

• Lower monthly payment and upfront costs: Leasing is cheaper in the short term because you don’t usually need to come up with a down payment and the monthly lease payments are usually cheaper than buying a car. That’s not to say there are no upfront costs for leasing. You may need to pay a security deposit, acquisition fees, taxes, registration, and your first monthly payment. 

• Lower maintenance costs: A lease is usually for a new car that has to be returned in 2-3 years. This means you have the car when it's new and has the least likelihood of mechanical problems. Plus, it’s probably still under warranty. Overall, this can mean lower maintenance costs for you.

• Newer car: If every 2-3 years you turn in your old car and go get a new one, you are always driving a new model.

• Option to buy: If you love the car and want to keep it, then you might be able to make a deal to buy your leased vehicle when the lease term expires.

The cons of leasing a car

• No ownership: If you lease, every car payment you make goes 100% in someone else’s pocket. You aren’t getting closer to owning an asset. It’s like renting an apartment vs. buying a house. A mortgage payment gives you equity in a home while paying rent is just money you don’t see again. 

• Costs more in the long run: While it can be cheaper in the short run to lease a car, you never get a break from payments. You just keep paying for a car, trading it in, and doing it again. You won’t have anything to show for all those payments, and they add up over time.

• Mileage restrictions: A car’s value depreciates as it ages, but a car with more miles on it loses value faster than one with fewer miles on it. To preserve the value of the car, the lease contract will limit the number of miles you can put on it. The cost of going over could be very high. If you drive a lot, consider the extra cost of the excessive mileage you’ll put on the car.

• Wear and tear: Similar to the above, a car is expected to get some wear and tear over time. This gets factored into the price when you get the new lease. But if you damage the car, cause excessive wear and tear, or modify the car in any way, that could lower the value faster than the leasing company calculated, and they will charge you to fix it.

• Insurance costs: It’s a good idea to have full coverage car insurance for any car, but because you don't own a leased car — nearly all lease companies will require it. You also may be required to pay for gap insurance. This insurance pays the difference between the replacement value of the car, which is what normal insurance will give you if the car is totaled or stolen, and any amount you might owe the leasing company.

• Early termination fees: Leasing a car means keeping with your agreement. If you decide you don’t like the car or can’t pay for it, you could face hefty early termination fees that could be the equivalent of paying the whole term upfront. Make sure you know what you’re getting into when you lease a ride.

The pros of buying a car

• Ownership: When you spend a lot of money on something, it's nice to know you get to own it. Once the payment is done, if you choose to keep the car, you can go payment-free for as long as the car holds up. You are also free to sell it or trade it in at any time.

• Freedom and flexibility: If you lease a car, you’re driving someone else's car, but when it's yours, you can customize the car any way you want. If you want to paint it pink or alter the engine, you might hurt the resale value, but no one is going to stop you.

• No mileage restrictions: If you want to take a road trip or a job that requires a lot of driving, you don’t have to figure out if it's going to put you over in miles.

The cons of buying a car

• Higher monthly costs: Buying a car not only costs more upfront because of the down payment but usually, a car loan payment is more than a lease payment.

• Depreciation: Cars lose value, and if the car is yours, that matters. After about 10 years, most cars have lost almost all of their original value.

• Repairs: New cars usually have warranties, but after a few years, it's on the owner to pay for surprise repairs. Some repairs can be really expensive.

• Resale burden: While a lessee gets to drop their car off with no obligation every 2-3 years, if you want a new car, you have to deal with the hassle of selling or trading in your car.

What’s right for you and your budget?

Is it better to lease or buy a car? The truth is: it’s personal. If you value always having a new car with a lower monthly payment and you don’t mind limiting your driving distance and customizations, leasing might be for you. 

If you want to save money long-term, drive and customize your car as much as you want, and know that you own your car, buying might be the best option for you. 

No matter which you go with, having a good credit history can help you to get the best car deal. Favorable financing can save you a lot of money. If you want to understand the financing deal you’re getting, check the APR. The APR includes all the fees and interest in one place so you’ll know how much you’re paying to finance your new car. It makes comparing deals you’re being offered much easier to figure out. 

Whether it's helping you save for that down payment or teaching you how to build a strong credit history, Greenlight can keep you ready for all the exciting events in your life. Learn more about Greenlight’s credit building offerings today!