Lease vs buy a car: Which is better?

If you're in the market for a new ride, you may be unsure about whether to lease vs buy a car and the different financing options. Generally, leasing comes with lower average car payments but certain driving restrictions. Buying a car is more expensive but may be cheaper in the long run if you plan to keep it for a while. Here's how each option works. 

What does leasing a car involve?

Think of leasing a car as a long-term car rental. In exchange for monthly lease payments, you retain the vehicle for a set period, usually a few years. 

You may need to pay a down payment and an acquisition fee to lease a vehicle. The down payment goes toward the total value of your vehicle lease — the larger your down payment, the lower your average lease payments. You'll also pay interest, often referred to as the "money factor" in lease agreements. 

Most auto leases include mileage limits ranging from 10,000 to 15,000 annually. You'll incur a per-mile penalty if you return the vehicle with mileage that exceeds the limits. The lessor may also charge you for excess wear or tear and a disposition fee when your lease ends. 

What are the pros of leasing?

There are several reasons why you might choose a lease vs buying a car. 

Lower monthly payments

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Leasing a vehicle is usually cheaper because you're not paying the car's entire value. Instead, you're paying the vehicle's estimated lost value, or depreciation, during the lease term. You'll also pay interest on that amount. A leased car's monthly payments can be significantly less than if you buy it.

Access to newer technology and models

People who lease vehicles may turn their car in for a newer model once the lease ends. That means you'll have a consistent rotation of newer vehicles with the latest technology.

Easier vehicle trade-in process

At the end of the lease term, you can either buy out your lease or turn the car in. 

What are the cons of leasing? 

Leasing a vehicle may not be the right choice for everyone. Here are a few drawbacks to be aware of.

• No vehicle ownership: As a lessee, you don’t own the car, and therefore have no equity because it's not your asset.

• Mileage restrictions: Exceeding the mileage in your lease contract can be costly. Check the per-mile penalty carefully to understand your responsibilities.

• Potential additional fees: The lessor may charge you for excess wear and tear or modifications to the vehicle. Some lessors may require you to carry gap insurance.

What does buying a car entail?

When you buy a car, you decide how to use and maintain it. You aren’t required to follow a strict maintenance schedule, drive under a specific mileage limit, or pay fees for wear and tear. If you have the funds available, you may buy the car outright.

However, many people can’t afford to pay for a car upfront. Instead, they use a combination of a trade-in or down payment and an auto loan. Your trade-in or down payment value reduces the money you'll borrow through the loan. The auto loan will include a set term and an interest rate, which determine your monthly loan payments. 

Once you pay off the car loan, the lienholder transfers the title to you, and you become the sole owner of the vehicle. If buying makes financial sense for you, here’s how to pay off a car loan faster.

What are the pros of buying?

You can look forward to several advantages when buying a car vs leasing. 

Long-term cost-effectiveness

A car can remain drivable well past the day you repay a car loan. If you keep up with maintenance and maintain safe driving habits, a car can last longer. For instance, if your vehicle has a five-year loan term and you keep it for 15 years, that's 10 years with no car payment. 

Customization options

No one can stop you from modifying your vehicle to suit your tastes. You can install upgraded speakers, paint the car a new color, or change the rims as long as you comply with state and local laws.

No mileage limits

You can drive a car you own as much as you want without paying any penalties for excess mileage. 

What are the cons of buying?

There are a few disadvantages to buying a car. 

• Higher initial costs: Your monthly payments may be higher than if you were to lease the vehicle. You can lower them by putting more money down or trading in your old vehicle. You can also avoid these common pitfalls that increase your total loan balance. 

• Depreciation concerns: A new car depreciates instantly after leaving the lot. You may owe more on your loan than your car is worth for some time. 

• Repairs: Your new vehicle may come with a warranty that covers some maintenance and repair costs. However, once the warranty ends, you're responsible for paying repairs out of pocket.

How do personal driving habits impact the decision?

When weighing leasing vs buying a car's pros and cons, it's also important to consider your driving habits. If you frequently drive long distances, you may be more likely to exceed a lease's mileage restrictions. 

But there are ways to mitigate some of these costs. Teen drivers, for example, can use a safety app like Greenlight Infinity, which has family location sharing, SOS alerts, crash detection, and driving reports with real-time alerts.¹ You can earn up to 5% on savings* – more $ in your pocket for car or insurance payments – or to save for a new car.   

Your location also matters. City drivers may have more consistent driving conditions. Rural drivers may experience more dirt roads, unpaved surfaces, or potholes that cause damage. Bad driving conditions can take a toll on the car, so you might owe penalties for excess wear and tear on a leased vehicle. 

How does credit score affect leasing or buying?

Your credit score matters whether you plan on leasing or buying a car. Lenders will consider your score when deciding whether to approve your financing and at what interest rate. If your score is low, you may find it harder to qualify for financing or get the best interest rates. Saving for your first car can help you put more toward a down payment, which may qualify you for better financing options. 

Build your family’s money smarts 

Ultimately, deciding whether to lease a car or buy one is personal. Knowing the pros and cons of each option can help you make an informed decision.

Know the ins and outs of personal finance: Bookmark the Greenlight Learning Center for fresh resources on parenting and family finances. 

¹Requires mobile data or a WiFi connection, and access to sensory and motion data from cell phone to utilize safety features including family location sharing and driving alerts and reports. Messaging and data rates and other terms may apply.

*Greenlight Core and Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Max families can earn 2% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary I Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.