After housing costs, car ownership is typically the biggest expense for the majority of American households. And today, with the cost of cars rising alongside record interest rates on personal loans, this cost is more cumbersome than ever. This means that American motorists have to make careful and calculated decisions about the best way to access a personal vehicle. For most consumers, this comes down to a choice between leasing versus buying or financing a car.
But which is the most cost effective option? Well, like most financial questions, the answer usually comes down to personal circumstances. The best option for you will depend on an array of factors including your initial budget, your credit standing, your intended usage, the type of car you want, and any plans you may or may not have to modify the vehicle once it’s in your possession.
If you’re still trying to decide between car ownership and a car free lifestyle, check out our look at the financial pros and cons of living without a car. Otherwise, read on to find out what factors you must consider before choosing either to lease or buy a new car.
Pros of Financing a Car vs. Leasing a Car
When you finance a car, you will typically take out a loan with a bank to finance the eventual purchase of a vehicle. Your agreement will usually include a down payment as well as an arrangement to pay a fixed monthly payment to your lender. Your auto loan payments will generally include monthly installments on a principal amount plus interest.
Most car buyers will finance the purchase of a new vehicle through a dealership over the course of four to six years. At the end of that term, the buyer will own the car outright. This arrangement offers several distinct benefits to the buyer.
1. Complete and Total Control
The clearest benefit of outright ownership is the unfettered control that you have over your vehicle’s usage, appearance, and functionality. Simply stated, once you initiate the process of financing the car for eventual ownership, it’s yours to do with it what you will.
As the article from Investopedia explains, as the buyer, you “have complete control over how you improve your car or, for instance, modify its appearance. If you financed its purchase, once that loan is paid off, you can keep it until it dies, trade it in, sell it outright, or give it to a family member. You get to decide.”
So if you want to install a stereo system and a subwoofer the size of a federal mailbox, you can. If you want to add a rear spoiler so your Honda Civic looks like a Formula 1 race car, you can. If you want to cover the entire thing from front fender to rear bumper in Smash Mouth and Blink-182 bumper stickers, that is entirely your call. That’s the beauty of ownership. You don’t get that kind of flexibility and personal expression from a lease.
We wouldn’t necessarily suggest any of these modifications from a fiscal perspective. But there’s more to life than money. So if part of car ownership involves personal expression, you’re probably more likely to choose car ownership. Speaking more practically, the same is likely true if you own a small contracting business and you need to add a winch, additional towing capacity, and high powered overhead lights to your pickup truck.
In other words, once you enter into an arrangement to finance your car, you have the freedom to adapt it to both your personal taste and your practical needs.
2. Investment in an Asset
When you finance a car, your monthly payments actually allow you to build equity, ultimately moving toward outright ownership of the vehicle that you are financing. When you reach the point of ownership–which usually occurs at about the five or six year mark–you will no longer be making monthly payments to a bank or lender.
This will dramatically reduce the monthly cost to own and drive your car. And while it’s absolutely true that this car is a depreciating asset, its value to you is largely steeped in its functionality. If you effectively maintain your car and it comes from a make and model with a good track record for longevity, there is good reason to believe this asset will continue to contribute to your productivity for years beyond the life of your finance agreement.
As the article from Consumer Reports notes, “If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.”
Alternatively, if you decide at any point past the time that you’ve completed your finance agreement that you’d like to move on to a new car, any well maintained vehicle will continue to have resale value in the used car market.
3. You Can Buy at Numerous Price Points
The great thing about purchasing a car is that you have a ton of options in terms of what you spend and how you find the car you want. Whether you’re in the market for a new car, a used car from a dealership, or a used car from a private seller, there are plenty of avenues you could explore, and each comes at its own price point.
While the average new vehicle will cost just over $48,000, the average pre-owned vehicle will cost just over $26,000, according to an article from Bankrate.
So while you may be considering financing a new car with a certified dealer, this is hardly your only avenue.
According to an article from Consumer Reports, you can “consider buying a less expensive new car or a well-maintained used car, such as a certified pre-owned vehicle from a franchised dealer, or getting a longer loan term. Whether you get your new car with cash, a loan, or a lease, you can save by choosing one that holds its value well, stays reliable, and gets good fuel economy.”
The point is, if you’re planning to buy, you’ll almost certainly have more avenues and price points to explore than you might if you’re planning to lease.
4. Greater Negotiating Power on the Purchase Price
It’s also fair to say that when you’re dealing with a lease, most lenders will simply expect you to accept their terms or hit the highway. You can anticipate just a bit more flexibility when it comes to sellers. Such is to say that wherever you ultimately choose to pursue this purchase, don’t be afraid to negotiate. You won’t have this kind of flexibility when you’re dealing with a car lease agreement. But when it comes to buying a car, there may be some wiggle room. As the conventional wisdom goes, the sticker price is merely a starting point for the negotiation process.
You may find a great deal more latitude in the negotiating process for the purchase of a car, versus a lease. As an article from CNBC explains, “If you’re leasing, you may be paying less for the same car on a monthly basis, but you won’t own it. Leasing to buy also doesn’t guarantee a good deal. When buying, you can always negotiate with the dealer and auto loan lender to bring monthly costs down. Lowering the purchase price will result in savings, as will shopping around for the lowest interest rate on a loan.”
Make sure you do your due diligence as you research the car you wish to buy. Find out what price point it’s actually selling for, as opposed to the sticker price you see when you walk onto the showroom floor. Print out your findings and bring your research with you. Show the dealer that you’re prepared, that you know what the value of your desired vehicle is, and that you expect a fair price. Use this power to negotiate a price that matches the market for the car you want.
And keep in mind that you typically won’t have this kind of leverage when it comes to leasing a vehicle. Price negotiation is a feature specific to financing or purchasing a vehicle.
5. The Availability of Used Cars
If you’re in the market to purchase, don’t overlook the economic sensibility of purchasing a well maintained used vehicle. While on the surface this may not sound like a more savvy investment than a new car, the reality is that the sticker price for a used car reflects its value after the vehicle’s depreciation, or at least, after the steepest part of this decline in value.
According to an article from TaxAct, “Usually, purchasing a pre-owned vehicle is the most financially savvy decision. That’s because you avoid steep first-year depreciation. On average, a new car loses 10 percent of its value when you drive it away from the dealer and 10 percent more during the next year. A new car loses an average of 60 percent of its total value during the first five years.”
In other words, when you buy a good, sturdy used car, you are likely buying this car at the value that it is most likely to retain for the next few years of ownership. Such is to suggest that finding a well-maintained used vehicle from a make and model with a reputation for longevity could be a great way to maximize the long term return on your investment. And even as maintenance and repair costs accumulate in the later years of the car’s life, the lower upfront cost of your initial investment should more than make up for these eventual expenses.
Cons of Financing a Car vs. Leasing a Car
While there are plenty of clear financial benefits to financing a car, it may not be the best option of every prospective car owner. For any number of motorists, drawbacks may include the higher purchase price of buying versus leasing, the burdens of long-term ownership, and the general depreciation of the asset in question. For those who are apprehensive about financing the purchase of a car, there are a number of potentially negative financial impacts to consider.
1. Large Down Payment
The number one barrier to car ownership is the upfront cost that comes with acquiring a car, new or used. According to CNBC, “It’s generally recommended to have a down payment of at least 20% if you’re buying a new car and 10% for a used one. This will help you ensure you’ll get a lower interest rate and lower monthly payments. Plus, you’ll be less likely to end up ‘underwater’ on your loan (or owning more than your car is worth). Understandably, 10% or 20% can be a large sum to come up with. A car lease doesn’t require a large down payment. And if you have good credit, you might not even have to put down any money at all.”
So from this perspective, some motorists may simply find that leasing a car is more financially manageable, or that leasing provides access to a higher quality vehicle.
By contrast, if you intend to finance a vehicle for eventual outright ownership, you should expect to pay the full 20% down payment. Depending on your financial situation, the size of this required down payment could limit the type of car you can afford to drive off the lot. Simply stated, it must be a car for which you can produce at least 20% of the value right from the start.
Otherwise, your options may be somewhat more limited. With a lease, you will likely find that the initial outlay of money is lower for a car of equal value. So in this sense, financing a new vehicle could actually limit your options relative to leasing.
2. Higher Monthly Payments
It’s not just the initial payment that’s higher for a purchase, as opposed to a lease. The same is typically true of your monthly payments. There is typically a pretty substantial difference between what you’ll pay each month to drive a car versus what you’ll pay each month to advance toward total ownership of that car.
According to an article from Investopedia, “When you buy a car, you will probably spend more each month. For example, the average monthly payment for those who bought a Honda Civic was $523 — $115 more than an average monthly payment for leasing it, according to Experian’s State of the Automotive Finance Market report for the second quarter of 2023.”
Insofar as these higher payments will help you ultimately achieve ownership of your vehicle, this is a good investment. But that may not matter if those expenses exceed your financial threshold. A car loan will almost invariably carry higher monthly payments than a car lease. For some drivers, this can make car ownership cost prohibitive relative to leasing.
3. Investment in a Depreciating Asset
In the section above, we pointed out that purchasing a car is an investment in an asset. While this asset has clear value based on your usage, as well as some resale value at the end of your ownership term, the reality is that your car will decline in value every year that you own it.
A car will generally depreciate roughly 20% in value over just the first year of ownership, and an additional 15% every year after that over the next five years. At that point, its resale value will be largely based on a combination of factors including the original make and model and how well you’ve maintained the car over its lifespan.
Either way, when you make the decision to purchase a new vehicle, you are taking ownership of this car during its most vital years, which are incidentally also the years during which it sees its sharpest decline in monetary value. While you will more than likely yield value from the use of this vehicle, the actual resale value of this asset will plummet during the course of your ownership.
4. Long Term Maintenance Costs Are On You
One reason that resale value tends to go down over the life of the vehicle is because the cost of maintenance will typically rise over this same period of time. In other words, as the value of this commodity goes down, the cost to maintain it actually goes up.
Indeed, once you own a car, you own all of its issues–past, present, and future. As the article from Investopedia notes, “Buying, whether with cash or with a loan, means you own the car 100%. Over time, owning a car can be more cost-effective—but you’ll also have to pay for repairs and upkeep.”
As the car ages, those costs may go up. This differs from a lease, where you’ll generally drive the vehicle during what are likely to be its least problematic years. As the owner of a car, it is incumbent upon you to maintain and repair your vehicle. After all, at this point, its greatest value is its continuing ability to enhance your productivity and mobility. But depending on the car and how well it has been maintained up until this point, keeping this ability intact could cost you.
5. The Bank Owns Your Car Until You Make the Final Payment
While you do build equity toward ownership of a car, financing can be a bit of a precarious situation if your finances aren’t assured in the long term. The reality of this arrangement is that you are not the owner of your vehicle until you have satisfied every dollar and cent of your financing agreement. Until that point, the bank that holds your auto loan still has considerable leverage over you.
As an article from Investopedia explains, “As the car is secured by your loan, your car could be at risk of being repossessed by the lender if you fail to make repayments and default on your loan. If in the rare case this happened it could negatively impact your credit history.”
While the expectation is that you will be in a position to meet your responsibilities as a borrower, financing does place you at risk. This is something you need to be aware of before you enter into any financing agreement. Be sure that you are borrowing responsibly, and that you don’t take on more than you car realistically handle.
Cons of Leasing a Car vs. Buying a Car
Plenty of motorists are moving away from the idea of long term ownership and toward the option of leasing. In most cases, leasing is a three year arrangement in which the motorist will pay a lender a fixed sum each month plus interest to “borrow” a vehicle. After 36 months, the term of this arrangement will typically end. Many lessees simply transition from one lease agreement to the next every few years.
However, there are a few drawbacks to this process for consumers that you should be aware of if you’re considering leasing a car.
1. Limited Negotiation Power
You may run headlong into one of the first drawbacks to leasing at the very start of your intended transaction. While negotiation is more or less an expected part of the process when you’re looking to buy a car, the same is not necessarily true of leasing.
Your leasing company is typically a lot less flexible when it comes to budging off of the sticker price. As an article from Investopedia points out, “In most cases, haggling with the leasing company won’t bear much fruit. This is especially true of brand-specific leasing companies, which have a reputation for standing firm on their buyback price.”
So while you may find the dealer in a used car lot far more willing to negotiate on the starting price, going with a lease pretty much guarantees that you’ll be paying something close to the number on the sticker.
2. Mileage Limits
If you’re used to driving without limits, those mileage restrictions that come with a lease agreement may not be ideal for you. One long road trip can throw you wildly off of your budget. Most lease deals will come with a mileage limit of 12,000 miles per year, or 36,000 over the life of the lease.
If you do much more than your daily commute and day to day errands in this vehicle, you could risk running over those mileage restrictions. One of the major downsides of a lease is the anxiety that comes with counting and limiting your mileage, especially as you near the end of the lease and realize that you’re well ahead of pace.
In many cases, you will be required to pay per mile for the overage. If you plan to move into a new lease agreement with the same auto dealer, they may be willing to roll those overages into the arrangement. Otherwise, this is an added expense that you will have to take into account at the end of the lease agreement.
3. Hidden Fees
Going over your mileage restrictions isn’t the only potential added cost when it comes to navigating an auto lease. According to the article from Investopedia, “Fees in your lease contract apply to excess mileage, modifications to the car, and excess wear and tear. There’s also an early termination fee if you decide to end the contract early and an acquisition fee (also called a lease initiation fee). Once the contract ends, you may have to pay a fee to cover what the dealer pays to clean and sell the car. Finally, unless the lease includes gap insurance, you may also owe costs related to accidents you may have had that your insurance doesn’t cover.”
In other words, it is critical that you read the fine print on your lease agreement. Make sure you understand all the costs and fees that come with both the initiation and end of the lease. You may find that you are responsible for a number of additional expenses as you transition from one lease to the next.
Some of these costs are difficult to anticipate as you sign that initial lease, which means you may well be blindsided by them when you near the end of that three year period. Make sure you know what to expect when you prepare to turn in or trade your vehicle, and that you are budgeted to handle it.
4. Accelerated Depreciation
When you lease a car, you will own it for its very best years. But there is a bit of an irony to this. As an article for Consumer Reports points out, this is also the point in the car’s life span when it sheds the most value at the quickest pace. The article notes that “In the end, leasing usually costs you more than an equivalent loan because you’re paying for the car during the time when it is most rapidly depreciating.”
In other words, you’re paying for a car at its uppermost value, but you are ultimately getting zero long term value in return. When these years of precipitous decline in value have ended, so too will have the terms of your lease. At that point, most consumers will simply transition into a new lease agreement, once again committing to a vehicle at the height of its sticker price and at its most rapid stage of depreciation.
5. Unmanaged Wear and Tear Come Out of Your Pocket
When you own a car, it’s a good idea to get regular oil changes, wheel balancing, brake pad replacements, tune ups, and whatever else is required to keep your car in good running order. After all, this car is your asset. You should protect it.
But if you’re leasing the car, failing to take any of these steps could actually cost you. As the article from Chase Bank explains, “When you lease a car, you may be required to pay extra for excess wear and use on the vehicle. Standard wear and use are expected, but anything deemed excessive may require repairs or result in fees. Excess wear and use may also further reduce the market value of the vehicle, which may be a consideration if you decide to purchase it.”
The long and short is that if you lease a vehicle, it will be incumbent upon you to closely guard the condition of this vehicle. Because every scratch, dent, and stain will be taken into account when you return the car to the entity which owns it. And those imperfections may end up costing you.
6. Zero Recourse for Buyer’s Remorse
If you buy a brand new car and you absolutely hate it, there’s no question that it’s a huge bummer. But at least you can cut your losses, sell the car loan to a new buyer, and find a car that actually suits you. Not so for a lease. You’re basically stuck with that car for the duration, even if the driver’s seat causes you intractable back pain and you hate the way the stick shift feels on your right hand.
As the article from Consumer Reports explains, when it comes to leasing a vehicle, the options are far less desirable for those with buyer’s remorse. Indeed, “If you decide that you don’t like the car or if you can’t afford the payments, it might cost you. You will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they’ll all be due at once. Those charges could equal the amount of the lease for its entire term.”
The point is, if you lease a car, you’d better hope you like it enough to live with it for the next three years.
Pros of Leasing a Car vs. Buying a Car
1. Lower Monthly Payments
While you may not necessarily be building equity every time you make a monthly payment, the good news with a lease is that your payments will typically be lower. As an article from Chase Bank points out, “All things being equal, the monthly payment on your leased vehicle will generally be less than the monthly payment of a vehicle purchased with financing. This goes for the down payment as well.”
So what’s the big takeaway? Leasing may give you the ability to buy a costlier car than you might have otherwise been able to afford. This could include cars which are more fuel efficient, which are safer to drive, and which offer certain advantages in terms of productivity. All of these factors can result in lower day to day expenses for the everyday consumer.
2. Regular Upgrades
The standard length of a lease is three years. With most leases, the end of three years will bring you the opportunity to upgrade to a new car. This means you can jump directly into a vehicle with three years of additional progress in areas like fuel efficiency, safety standards, and manufacturing practices. In other words, you’ll get a better car without any of the wear and tear that you just spent the last three years racking up.
The result will be a car that runs on lower fuel expenses, requires fewer maintenance costs, and provides greater protection and ruggedness in the event of an accident. To put aside the obvious benefits of driving a car that is safer and more secure in the event of an accident, you’ll spend less time shelling out money at the gas station and the repair shop.
3. Maintenance and Repair Coverage
Of course, when you lease, one of the other inbuilt advantages is that you may not even have to worry about the costs of maintenance and repair. Depending on the nature of your lease agreement, those costs may actually be covered by something called a bumper to bumper warranty.
Long-story short–when you lease a car, you’re just borrowing it for a few years. The owner–which in this case is the bank–wants to know that it’s going to get its asset back in reasonably decent shape. That’s why you can usually count on a lease agreement that comes with some measure of maintenance coverage included.
According to the article from Chase Bank, “Many new leased vehicles are covered under the warranty by the manufacturer for the entire duration of the lease. Under this coverage, the manufacturer or dealer may perform covered repairs, free of charge (will not cover damage due to an accident). On the other hand, if you purchase the vehicle, you are responsible for all maintenance costs and all repair costs when the warranty coverage expires.”
So as a lessee of the vehicle, you will be spared many of the expenses that come with repairs, maintenance, and normal wear and tear.
4. Own the Car During Its Best Years
One of the coolest things about leasing a car is that you’ll typically be behind the wheel of this vehicle for the very best years of its life. A leased car is rarely more than one or two years old when you drive it off the lot. It will have minimal mileage and no wear and tear.
So while many of the repair and maintenance costs will be covered, the reality is that your expenses in these areas should be pretty modest if you manage to stay out of any accidents. You can expect that your car will be in reasonably good condition for the life of the lease. Simply stated, you won’t be there to experience its latter years, its inevitable deterioration, and the various expenses that come with this stage of a car’s life cycle.
5. Tax Deductions Are Higher For Leases
While tax deductions are a standard benefit of car ownership in general, leasing a car may actually allow you to maximize those benefits. That’s because, according to an article from Investopedia, “If you use your car for business purposes, a lease may afford you more tax deductions than a loan. That’s because the Internal Revenue Service (IRS) allows you to deduct both the depreciation and the financing costs that are part of each monthly payment. If you’re leasing a luxury automobile, the amount that you can write off may be limited.”
Of course, be sure that you follow all the rules when reporting your taxes. But if you can demonstrate that your lease provides you with access to a vehicle for business purposes, you may be able to maximize your tax benefits.
6. Car Ownership Remains An Option
We admit, we may be burying the lede here just a bit. But it’s worth noting that entering into a lease doesn’t necessarily preclude you from eventually choosing to purchase the car that’s already in your possession. In other words, it may not just be a simple question of either/or when it comes to leasing versus buying a car.
Leasing a car still leaves open the option of entering into a personal loan and finance agreement. An article from Travelers Insurance notes that “Some drivers fall in love with their leased cars and decide to buy them. Typically, you can buy the leased car at the end of the lease term. The price is generally the car’s residual value plus processing fees required by the manufacturer. Buying a leased car for less than its current market value could be a good financial move.”
That’s especially true if you’ve exceeded your mileage limit, as purchasing the vehicle would ultimately spare you the added charges you might have otherwise been required to pay. As Investopedia explains, the typical three year lease includes a 36,000 mile limit. But, suggests the article, “let’s say you make long trips on a regular basis and racked up 45,000 over that stretch. If your lease has an overage fee of $0.15 per mile, you’ll have to pony up $1,350 when you return the car; some overage fees can reach $0.25. By purchasing the car, you don’t have to worry about that additional surcharge.”
Whatever you decide to do once you reach the end of your lease, one of the clear benefits is that you actually have the option of buying at this point in the process.
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Your options for car ownership may be somewhat more limited if you’ve been rejected for a loan. Factors like your debt to income ratio, low credit scores, and negative notations in your credit history can stand in the way of your ability to buy or lease a car at a fair market price.
That’s exactly why we would recommend jumping from here to our discussion on what to do if you’ve been rejected for a personal loan.