Should You Lease a Car or Get a Loan?
Understanding the difference between leasing a car and getting a loan can help determine the right financing option for you.
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By Christopher Boston
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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans. Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.
Contributions by 3 experts
CB
By Christopher Boston
CB
Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans. Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.
Contributions by 3 expertsUpdated: September 10, 2024
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When shopping for a new car, there are multiple factors you need to consider. Determining the right financing option is one of them.
Leasing a car and getting an auto loan both have advantages and disadvantages. Considering your circumstances and needs will help you make an informed financial decision. It’s also important to understand how leasing a car differs from getting a loan, what fees are involved and how to get auto insurance.
Car Sales and Leases Statistics in the United States
Knowing important facts and statistics about car sales and leases in the U.S. can help you better understand leasing and car loans.
The country recorded 3,326,000 new passenger car sales and leases in 2021. Of these, 793,000 were leases and 2,533,000 were car sales.
The average cost of monthly lease payment as of the second quarter of 2022 was $540. In comparison, the average loan payment for a new car was $667 per month. That’s a $127 difference monthly.
The Honda Civic is the most leased model in the country, with a 4.5% market share. It’s followed by the Honda CR-V (2.8%), Toyota RAV4 (2.7%), Ram 1500 (2.3%), Honda Accord (2.3%), Chevrolet Equinox (2.2%), Ford F-150 (2.2%), Jeep Grand Cherokee (2.1%), Ford Explorer (1.9%) and Toyota Tacoma (1.8%).
Buying means to purchase a car and acquire ownership by paying in lump sum or installments. On the other hand, leasing refers to an agreement that allows a person to use the lessor’s vehicle for a certain period in exchange for periodic payments.
Determining whether you should lease or buy a car requires understanding your options. Take some time to research and learn the differences between the two.
Below are some of the major differences between leasing and owning a car that you need to:
Leasing a Car Buying a CarUpfront costs
This is the amount you need to pay to gain the right to use the car. Upfront costs tend to be lower for car leases.
This is the cost of owning the car. It’s typically higher than car leases. Sellers may also require a hefty down payment.
Monthly payments
Payments for car leases are typically lower because you only pay to use the car. However, there may be high monthly finance charges.
Some buyers choose to take out a loan to finance a car purchase. This comes with monthly payments, which are typically higher than lease payments.
Maintenance
Typically, leased vehicles are under maintenance contracts. You’re only charged for routine maintenance, such as oil changes and tire rotations.
Buying a car makes you the owner of the vehicle. That means you’ll be responsible for all maintenance requirements and fees.
Wear and tear
The lessee ensures that the car remains in good shape. The lessor may charge extra for excessive wear and tear.
Wear and tear won’t have any effect on your monthly payments. However, it can lower the overall value of the vehicle.
Use or mileage
Car leases have mileage limits, typically around 10,000–12,000 miles annually. Extra charges may apply for every mile over the limit.
There’s no mileage limit since you own the car. However, excessive mileage impacts the car’s resale or trade-in value.
Customization
Lessees can’t customize or make changes to the vehicle's appearance. This will break your lease agreement and may lead to penalties.
Owning the car allows you to customize its appearance and features as you see fit.
Ownership
The lessee doesn’t own the vehicle. Depending on the agreement, you may either return or purchase the vehicle at the end of the term.
The buyer will own the vehicle upon completing all necessary payments.
End of the term
The lessee may choose to return, trade in or buy the vehicle at the end of the lease term.
At the end of the auto loan term, the owner of the vehicle can keep, sell or trade in the car.
Transfer
The lessee doesn’t own the vehicle, so they have no right to transfer or sell it.
The buyer is the car's owner, so they can transfer or sell it to another party.
Parties
There are two parties involved — the lessor (owner of the car) and the lessee (the user).
There are two parties involved — the seller and the buyer.
Leasing a car simply means renting a vehicle from a dealership for a certain period and mileage limit. You gain the right to drive the vehicle in exchange for monthly lease payments. Although this option can be a good idea, it’s not always ideal.
Your circumstances will determine whether you should lease a car or not. Make sure you consider the actual cost of leasing a car, its pros and cons, when it can be the best option and how to get insurance.
Monthly lease payments cost an average of $540 in the second quarter of 2022, according to Experian . Actual costs may vary depending on the vehicle model, term and mileage limit. There are also other fees the lessee should pay, such as acquisition fees, initial payment and security deposit.
The table below enumerates the most common fees and what they cover:
Type of Fee What It Pays ForAcquisition fee
The acquisition fee, also known as administrative, origination or bank fee, is the amount you need to pay the leasing company to establish the lease agreement. It typically ranges from a few hundred to a thousand dollars. Depending on the agreement, this can be paid upfront with the down payment or added to the monthly payments.
First payment
A payment for the first month is typically required before the car is released to the lessee. The amount depends on the vehicle, your location and the dealer.
Security deposit
Putting down a security deposit is typically necessary. This usually equals a month’s payment and will cover any damages that may occur to the vehicle.
Disposition fee
At the end of the lease, the lessee has the option to purchase or return the car. You’ll be charged a disposition fee if you choose to return it. It’s usually a few hundred dollars.
Sales tax
Vehicle leases are typically charged with a sales tax. The cost depends on state regulations.
Documentation fee
Documentation fees can be $150–$300. This fee is charged for the creation and processing of the car lease.
Upfront costs
A down payment is the amount you pay to get the right to use the vehicle. This is similar but typically cheaper than the down payment required for a car loan.
Wear and tear charges
The security deposit doesn’t always cover the wear and tear to the leased vehicle. The lessor may charge penalties for excessive damage.
Excess mileage
Going over the mileage limit set per the lease agreement may result in an excessive mileage fee. It typically costs a few cents per mile.
Weighing the pros and cons of leasing a car is an important step you need to take to make sure this is the best option for you. For instance, leasing may come with lower monthly costs. However, there are more restrictions. Consider your needs and determine if leasing benefits outweigh the drawbacks.
Leasing may not be the first choice of many when thinking of getting a car. But there are certain instances when it makes the most sense. For example, ex-pats, older adults, individuals with a fixed monthly income and those who tend to change cars quickly may find leasing beneficial.
If you find yourself in any of the following situations, you may want to consider leasing.
You need a vehicle for short-term use
The main point of a car lease is to have a vehicle you can use without the commitment and responsibility of being a car owner. Leasing is the better option if you plan on using the vehicle for a few years, whether for business or personal purposes.
You can’t cover high monthly payments
Buying a car requires you to cover the vehicle’s full price. Even if you take out an auto loan, monthly payments can be high. If you live on a fixed monthly income and find it difficult to shoulder high expenses, consider leasing a car. A report by Experian shows that you can save an average of $127 monthly by choosing to lease over getting an auto loan.
You’re an older adult
Seniors living on a fixed income and looking to drive for only a few years may find leasing a good idea. Leasing a car also allows them to take advantage of the latest safety systems and technology. Additionally, leasing requires less maintenance.
You’re an expatriate
Expatriates coming to the U.S. who want to enjoy driving around without a long-term commitment may find leasing cost-effective. You can keep the car for as long as you need and easily return it after the lease expires or when you no longer need it.
You like changing cars quickly
People who tend to keep a vehicle for around two–five years only may incur huge expenses due to constant purchases or trading up. If this is the case for you, consider leasing a car. After the lease term, you can switch to a newer model if you want.
Auto insurance provides financial protection against possible considerable expenses in the event of an accident. Most states require drivers to meet a minimum coverage requirement. However, some individuals who plan on leasing a vehicle may find car insurance a bit confusing.
The best car insurance will depend on specific factors, such as location, age, gender, credit score and driving history. Requirements for getting a policy may also vary depending on the state and leasing company.
Bodily injury liability insurance
This pays for the medical expenses another party may incur if the policyholder is at fault in the accident.
Property damage liability insurance
This coverage pays for damages the policyholder may cause to another party’s property.
Uninsured and underinsured motorist insurance
Getting an uninsured and underinsured insurance policy can protect you in the event of getting in an accident where the at-fault driver is uninsured or doesn’t have enough coverage. Some states may require drivers to carry this insurance.
Personal injury protection
Personal injury protection pays for medical expenses that you or your passengers may incur due to injuries sustained in a car accident. Some states require PIP coverage.
Collision coverage
Collision insurance pays for any damage to the leased car due to a collision with another vehicle or an object.
Comprehensive insurance
Comprehensive coverage pays for damages to the leased car caused by non-collision incidents, such as falling objects, natural disasters, vandalism and theft.
At the end of the lease term, the lessee is given four options.
You can purchase the vehicle and finance its remaining value.
If you no longer need a car, you may simply return it to the dealer.
If you want to continue using the vehicle, you can extend your lease for a limited time.c
If you want to lease the current vehicle, you can opt to re-lease. This is often a cheaper option than leasing a new car.
If you decide to end the lease early, whether due to a job loss, change in income or moving to another location, you may be subject to early termination rules per your lease agreement. Here are some of the possible options for you:
Transfer the remainder of the lease contract to another party
Pay off the amount stated by the lessor and sell the vehicle
Trade the leased car for another vehicle from a dealership
Keep in mind that early termination of a car lease may come with a fee. Make sure you discuss this with your lessor.
The main benefit of buying a car is ownership. Unlike car leases, the buyer gains full vehicle ownership after completing the payments. For some, this means paying a huge lump sum upfront. Others may opt for a loan and installment plan. No matter the financing, finding the right price and car is crucial.
Additionally, it’s essential to consider all fees involved, the pros and cons, and when it makes the most sense to purchase a vehicle.
Being a car owner comes with various expenses. Aside from the price of purchasing the vehicle, other payments are involved.
The average cost of car ownership is $9,282 per year or around $773.50 per month. Those who choose to finance their purchase through an auto loan may need to pay an extra $667 per month, according to Experian.
Below is a breakdown of the common fees car buyers need to take note of.
Type of Fee What It Pays ForTitle and registration fee
States charge a couple of hundred dollars for title and registration fees. In most cases, dealers have an agreement with state departments to give titles and registration for the cars they sell. Title and registration fees don’t go to dealers but the state.
Sales tax
Typically, states charge a sales tax for vehicle purchases. The cost may vary per state. Cities and counties may also charge sales taxes on top of the state tax.
Destination fee
The destination fee is the amount buyers need to pay to transfer the vehicle from the factory to the dealer. The automaker typically sets the amount.
Documentation fee
This refers to the cost a dealer charges for the processing of paperwork, such as the car title and registration. The cost may vary per dealer and location but typically costs a few hundred dollars. Some states impose a limit on how much dealers can charge.
Inspection and emission fee
Many states require vehicles to pass safety and emission inspection before they can be sold. Some dealerships pass this cost on to the buyer. Clarify this with your dealer to prevent unexpected expenses.
Similar to leasing, buying a car comes with advantages and disadvantages. Depending on your needs as a driver, the benefits may outweigh the drawbacks. The table below enumerates some of the major pros and cons of buying a car to help you get started.
Evaluating your financial situation and specific needs is the best way to determine if buying a car makes sense. A vehicle can be an expensive purchase. It’s important to ensure that it’s the best possible solution for you.
Buying a car may be better than leasing if you see yourself in the following situations.
You plan on using it for a long time
Leasing offers short-term access to a vehicle. Buying may be right for you if you plan on keeping the car for around five or more years.
You have special needs
If you or a loved one is a person with a disability, you may need a car with safety features. Depending on your circumstances, vehicle modification may even be necessary. In such a case, it’s better to purchase a car.
You drive a lot
If you plan on using the car often, you may want to consider buying it. That’s because car leases typically come with mileage restrictions.
You’re financially independent
If your financial situation allows you to spend a small fortune on a new car or if the monthly loan payments are affordable, then buying can be a good option.
Before choosing a vehicle, buyers should determine the best way to finance their purchase. Some individuals pay the full price of the car in a lump sum. This is a good idea if you can afford to pay cash upfront. Otherwise, you may need to take out an auto loan.
Here’s a simple guide to help you navigate auto loans.
One of the most important factors lenders consider when evaluating loan applications is the credit score. Understanding the importance of your credit score can help you find the best lender and loan offer. Your credit score reflects your creditworthiness and ability to repay the loan. A higher score can help you access more loan offers. A lower score may limit your choices.
Don’t settle for the first lender you find. Lenders have different loan offers, requirements and terms. Some may also offer promotional rates or discounts. Generally, getting quotes from at least three lenders can help determine how much your monthly payments will cost.
There are certain terms you need to familiarize yourself with if you plan on taking out an auto loan. Here are some of them:
Once you’re 100% sure that an auto loan is the right financing option, you may proceed with the application. Choose the lender that offers the best deal.
You may submit multiple applications. However, doing it in a short period of time isn’t recommended as these applications may impact your credit score.
If your loan application gets approved, the lender will send you the loan agreement. Review this document. Read the fine print. Make sure you understand all details to avoid misunderstandings.
Clarify all terms and conditions with the lender. Negotiate if necessary. Once you find the deal acceptable, you can sign the loan agreement. Depending on the lender, the loan amount may be released within a few days.
Choosing the right auto loan company can be challenging, especially for first-time borrowers. Doing your research, shopping around and knowing what factors lenders consider can help you find the best deal.
The best auto loan deal may vary depending on your needs and circumstances. That’s why shopping around is necessary. Compare loan offers from at least three lenders. Check the loan features, especially the annual percentage rate, monthly payment and the length of the loan.
Researching the lenders available can help you decide where to submit a loan application. Review previous and current clients to see if a lender has reasonable rates and good customer service.
Don’t submit applications to multiple lenders at once. Lenders tend to conduct a hard credit inquiry when evaluating loan applications. This credit check is recorded in your credit report and may affect your credit score. Some lenders have pre-qualification tools that borrowers can use to check if they qualify for a car loan. These tools may also allow borrowers to check potential loan amounts, payments and interest rates.
Try to improve your credit score first before applying for a loan. Generally, individuals with good to excellent credit scores have a higher chance of getting approved for a loan. They may also have better loan options.
Choosing between an auto loan or a car lease can be a challenging experience. Knowing what factors to consider can help you determine the more appropriate option. Comparing costs is a must, but understanding your needs and financial situation is also crucial.
Below are some tips that may help you decide between the two options.
Determine how much you can spend on monthly payments. This is one of the most critical steps you should take. You wouldn’t want to enter a commitment without proper consideration. If you’re living on a fixed income and looking for the cheapest option, leasing may be right.
The actual cost of leasing and buying goes beyond the initial costs. For instance, the upfront costs for a new car model may be cheap, but there are other expenses you need to take care of, like maintenance, tax and monthly payments.
Another important factor to consider is how you plan on using the car. Leasing is more cost-effective if you only need it for a few years. But if you plan on using the car often, you may have to consider buying. That’s because car leases have mileage restrictions.
There are various terms used in the car leasing industry. Below are some terms and definitions to help you better understand leasing.
DefinitionAcquisition fee
A fee charged to the lessee to start a lease, which generally begins in the $400 to $500 range.
Capitalization cost
The final negotiated price of the vehicle to be leased.
Closed-end lease
In this lease, the residual value (value of the vehicle at the end of the lease) is estimated and agreed upon in advance by you and the dealer. At the end of the lease, you won't have to pay extra (or will receive a refund) if the car turns out to be worth less or more than the agreed upon price.
Depreciation
The value that a vehicle loses over time.
Disposition fee
A fee charged when you return your vehicle at the end of the lease, typically $350, that covers the dealership's cost to dispose of the vehicle.
Early termination fee
A fee charged when you end the lease before the agreed upon term is up. According to Consumer Reports, this fee can be almost as expensive as finishing out the contract.
Mileage allowance
A maximum limit you may drive the car each year without having to pay an extra fee. A 12,000 mileage allowance per year is typical on most leases, but this can be negotiated.
Mileage fee
A fee that you have to pay if your drive over the limit specified on a lease. This is often around $0.25 per mile.
Money factor
Known as the lease factor, it is the financing fee you are charged. It is expressed not as a percentage rate, but a multiplier. To determine the money factor, divide the interest rate by 2,400. For example, a 6.96 percent interest rate is equivalent to a money factor of 0.0029.
Open-end lease
In this lease agreement, you agree to take financial risk for the value of the vehicle when the lease expires. If the vehicle is worth less than expected, then you have to pay the difference at the end of the lease. If it is worth more, the dealer pays you the difference.
Payoff amount
The amount of money you have to pay at the end of the lease if you decide to purchase the vehicle.
Purchase option price
The total price that you would have to pay to purchase a leased car. This price is stated in the lease agreement.
Residual value
The leasing company's estimate of what the car will be worth at the end of the lease.
Security deposit
A deposit, typically equaling one month's payment, you pay before taking over a leased vehicle. You'll get this money back if you return the car in relatively good shape.
Term
The length of the lease agreement. Most leases are for either 24, 36, 48 or 60 months.
Ask the experts:
Trent Denman is an award-winning sales and auto broker. He has been a broker since 2011 and served in the automotive industry since 2003, where he's earned multiple sales accolades.
Auto Broker at HM Brown AutomotiveThere are three primary things to consider when considering financing or leasing a car:
Giovanni Velez is the marketing director for the Gunther Motor Company, an 11-store auto group spanning South Florida. He has more than15 years of experience in the automotive sales and.
Director of Marketing and Sales at Gunther Motor CompanyThe most important factors for car buyers to consider when deciding if it's better to buy or lease are how long you want to own the car, your budget, personal preferences and the miles you typically drive yearly.
Most new car leases are for three years, while financing contracts typically last five years or longer to lower the monthly payment. Looking down the road, drivers should consider whether they will need a different vehicle in three years or continue to drive their current vehicle. You can ask yourself questions: Do you expect your family to grow over the next three years? Is your commute likely to change? Do you want a sporty sedan for the next few years but know you'll want a family SUV soon? Are you happy with two rows of seats now, but know you'll need more room soon for multiple child safety seats, booster seats and friends?
When choosing between buying or leasing, your vehicle timeline is important. Essentially, how long do you want to drive your next car? If it’s three years, then leasing is the way to go. If it’s more than three years, we’d recommend financing.
Another factor to consider when choosing to lease or finance is your budget. You no longer have a car when you turn in your vehicle at the end of your lease contract. You've essentially rented a car for three years. Unless you purchase your vehicle for the predetermined price, you'll need to buy a car or start a new lease. Many drivers prefer this because leasing gives greater flexibility than buying.
When you finance a vehicle, you're making a purchase. At the end of your finance agreement, you have a car. But then, it is up to you to maintain that car and pay for repairs after warranties begin to expire.
Drivers should consider how much they drive when buying a car or leasing. Lease contracts have annual mileage limits to maintain the vehicle's resale value. If you exceed these limits, you must pay for every mile over the allotted amount when you turn in your car. We recommend financing over leasing if you rack up heavy mileage every year.
Lastly, what are your personal preferences? If you love having a new car smell at all times and enjoy the security of warranty protection, then leasing is an excellent option. Another benefit of leasing a new car every three years is you always have the latest infotainment technologies, safety features, and performance advancements.
If you prefer owning what you drive, plan to drive your next car for five to 10 years and enjoy owning your vehicle when you make your last payment, then financing is an excellent way to buy a car.
