Should You Lease or Buy a Car?

The short answer

With a lease, you’re basically paying for the car’s depreciation, the value it loses while you drive it, over the length of the lease, plus interest and fees. With a purchase, you pay for the whole car.

That’s why leasing usually means a lower monthly payment and a new car every few years, but you never own it and you live within a mileage limit. Buying usually costs more per month at first, but the car is yours, there’s no mileage cap, and once it’s paid off you drive it payment-free.

Neither is always cheaper. The right choice depends on how much you drive, how long you keep cars, and whether a low payment or long-term value matters more to you.

How leasing works

A lease is a long-term rental, usually 24 to 39 months. Your payments cover the difference between the car’s price today and what it’s expected to be worth when you turn it in, spread across the term, plus interest and fees.

Your payment is built from a few numbers worth knowing:

• •Capitalized cost: the price of the car in the lease. It can be negotiated, just like a purchase price.
• •Residual value: what the leasing company expects the car to be worth at the end. A higher residual means a lower payment.
• •Money factor: the lease’s interest rate, written as a small decimal. Multiply it by 2,400 to get a rough APR.
• •Mileage allowance: commonly 10,000 to 15,000 miles a year. Going over usually costs a set amount per mile at turn-in.

What happens when a lease ends

You’re not locked into giving the car back. Most leases let you choose:

• •Turn it in: return the car, pay any wear or mileage charges, and walk away or lease something new.
• •Buy it: if you really like the car, you can purchase it for the buyout price written in your lease, which is based on the residual value.
• •Buy it and sell it: if the car is worth more on the market than your buyout price, you can buy it and sell it yourself, or trade it in, and keep the difference as profit. One catch: some brands only let their own dealers buy out a lease, which can limit trading it in somewhere else, so check with your leasing company first.

How buying works

When you buy, you pay the full price of the car, either in cash or with a loan. Each payment builds equity, and once the loan is paid off you own the car outright. You can drive as much as you want, modify it, and sell or trade it whenever you like.

The tradeoff is a higher monthly payment and, eventually, paying for repairs once the factory warranty runs out.

Leasing tends to fit if you…

• •Drive a predictable number of miles each year and stay under the allowance
• •Like having a newer car with the latest safety and tech every few years
• •Want a lower monthly payment on a nicer car
• •Prefer to stay under the factory warranty for most or all of the term
• •Use the car for business and your accountant says leasing helps with taxes

Buying tends to fit if you…

• •Drive a lot, or your mileage is hard to predict
• •Keep cars for five years or longer
• •Want to own something you can sell or trade in later
• •Plan to customize the car, or have kids, pets, or a job that’s rough on interiors
• •Want to eventually stop making car payments altogether

Costs people often miss

• •Acquisition fee: a charge many leasing companies add at the start of a lease.
• •Disposition fee: a charge some leases add when you turn the car in, often waived if you lease again with the same brand.
• •Excess wear and mileage charges: assessed at lease end, so take care of the car and track your miles.
• •Ending a lease early: usually expensive. Leasing works best when you’re confident you’ll keep the car for the whole term.
• •Sales tax: how it’s charged on a lease differs by state, so compare the total cost, not just the payment.
• •Interest on a loan: a longer loan lowers the payment but raises the total you pay. Look at the full cost over the life of the loan.

What to ask before you sign

• •What’s the selling price (or capitalized cost) of the car, before any payment math?
• •For a lease: what are the money factor, residual value, and mileage allowance?
• •For a loan: what’s the APR and the total amount financed?
• •Which fees are included, and are any add-ons optional?
• •Are there rebates or incentives I qualify for, like recent-graduate, military, or loyalty programs?