Auto Loans

Should You Lease or Buy a Car?

When it's time to shop for a new car, consumers face an often confusing choice: lease or buy?

Thanks to years of low interest rates, leasing a new car has become more attractive than ever, with deals on some vehicles presenting payments of $200 a month or less—often at rates that are lower than many car loans. And rather than come up with what often can be a hefty down payment to purchase a car, upfront leasing costs typically are just a few thousand dollars or less.

The flip side of that is that the car never is paid off, creating a situation where the driver faces a permanent car payment and is left at the end of the lease with no vehicle to drive, trade-in or sell.

When it comes to purchasing a car, improvements in the quality and durability of the typical new vehicle mean that they stay on the road for close to 12 years now. With many major banks and local credit unions offering auto loans at less than 4%, a buyer can pay off a new vehicle in four years and drive it payment-free for twice that long.

Both leasing and buying have their advantages and disadvantages, which means that—just like nearly everything else in personal finance—deciding what's best depends on each individual's needs and assets.

Leasing: More Car for Less per Month

When you lease a car, you're paying only for the time that you'll be driving the vehicle. Your cost is based on the difference between what the car's value is when you lease it and the residual value—what the dealer projects the car will be worth when you bring it back at the end of the lease.

One of the big attractions of leasing is that it allows you to always drive a new or nearly-new car, with most leases running 36 months. Repairs are likely to be rare or non-existent and maintenance will be mostly just oil changes, tires and brakes. Leasing also gives drivers the chance to get a bigger or more deluxe vehicle than they could afford if they were buying it outright. With many SUVs priced at close to $40,000, the monthly payment on a four-year loan would top $700. In addition, drivers pay less sales tax with a lease than with a purchase.

Leasing also gives drivers the opportunity to be flexible in what they drive. Newlyweds driving an economy sedan can easily trade up to a minivan at the end of the lease if they decide to start a family, or a driver who wants to downsize to cut his budget can trim his spending simply by leasing a smaller, cheaper car. And, drivers can change vehicles without having to deal with the hassle of negotiating a trade-in value for their old car or having to sell it privately.

Mileage Limits on Leases

One drawback to leasing is that the most affordable deals can severely limit how much you'll be allowed to drive, with leases typically restricting you to 12,000 or even 10,000 miles or less per year. Driving beyond your mileage limit means you'll pay a surcharge for each and every additional mile, typically between 10 cents to 25 cents per mile. With nearly 25% of U.S. workers commuting more than 42 miles per day to their jobs, according to the US Department of Transportation, additional mileage costs can quickly add up, making leasing far less of a bargain.

Financially, leases add up to be more expensive over time than owning, partly because you're always making a car payment. Another cost factor is depreciation. Driving a new car off the dealer lot results in a huge loss to the car's value as its status goes from "new" to "used," and you'll constantly be paying for that loss every time you take on a new lease. While new-car buyers also take the initial depreciation hit, driving the car for more years lessens the total cost.

The last financial downside to leasing comes at the end of the lease. First, you'll be financially responsible for any damage or excess wear and tear to the car, including scratches and parking-lot dings. The second risk is that if, for some reason, you need to end the lease early you'll face some hefty termination charges, which can hurt your credit, depending on how the lender closes out the account.

Buying What You Really Want

The big advantage in buying a car means that it yours for as long as you want it, and you get to choose exactly what you want. If you want a three-row SUV with a manual transmission in purple with a towing package and a sliding moon-roof, you can get it, whereas most vehicles offered for leases are limited to the most popular models.

You'll also be able to drive that car with no payment after you've retired any loan, allowing you to save what would have been your payment to offset maintenance and repair costs, put down more cash for your next car, or just to free up cash in your household budget. Over time, the cost of leasing vs. buying the same vehicle means that drivers who buy do tend to spend more cash up front but end up with a valuable asset that reduces their overall cost.

Buying also frees you from any concerns about mileage allotments and keeping the car in pristine condition. If scuffs, scratches and dings don't bother you, you don't have to fix them.

Another plus for buying is that owners can choose from used as well as new vehicles. Although some dealers do lease used vehicles, those deals are hard to find. Buyers are free to shop at any used car lot and from private sellers, giving them many more options on pricing and vehicles.

Longer Car Loans Bring Risks

Of course, as much as owning your own car can be a benefit, it also can be a problem. First, with the average new-car price hovering at more than $34,000, new cars are expensive, with some higher-end SUVs listing for more than $50,000. At best, you're likely to be tied into a car loan of four years or more, with some buyers taking out six-year and even seven-year payment plans.

In those cases, buyers are likely to owe more on their car than it's worth for quite a while. If the car is stolen or totaled in a wreck, the owner will be forced to come up with cash to pay off the balance between any insurance settlement and the loan balance. Those longer loans also leave owners stuck with a car they can't afford to keep or that no longer fits their needs.

And, with new cars being so expensive, even coming up with a small down payment plus tax and other charges means car buyers need a good chunk of cash or a valuable trade-in just to get into a car loan.

For buyers who do keep their cars long after paying off any loan, they face not only the cost of repairs and increasingly expensive maintenance, but also the hassle of arranging repairs, finding a reliable mechanic and the risk that as their daily mode of transportation ages, it can become increasingly unreliable. When it does come time to sell, an owner can face expensive repairs to make a vehicle marketable, as well as the trouble of arranging a sale or trade-in.

Driven by Personal Preferences

The decision between buying vs. leasing a car comes down to a choice of flexibility and affordability vs. long-term costs and personal preferences. If you don't have a lot of cash to spend, want low monthly payments and to avoid any risk of major repairs, a lease can make sense. On the other hand, if you want long-term affordability, a wider choice of vehicles and the option to drive your vehicles long and hard, purchasing can seem like the best way to go.

Either way, it's a personal choice where, as the new-car ads always say, "Your mileage may vary."