How to Decide Whether to Buy or Lease Your Next Ride

Considering a new car? Chances are you'll probably need some type of financing to make that happen. Find out whether it makes more sense for you to buy or lease your next ride.

Leasing a car

The basics:

Leasing is basically a long-term rental. Lease payments only cover the difference between the car's price (minus a down payment) and its estimated value when the lease ends. Upfront costs can include a refundable security deposit, first month's payment, registration, taxes and fees. You also pay for a set number of miles to drive. Financing is generally done through a dealer.

Pros of leasing:

  • Because you're not financing the full price, leasing a more expensive car might cost less per month than buying the vehicle.
  • Cars are usually under a manufacturer's warranty through the entire lease.
  • Basic maintenance is often fully covered.
  • Sometimes no down payment is needed.
  • You don't have to worry about selling the car.
  • A lease may lock in a purchase price if you prefer to keep the car when the term ends.
  • A lease can provide tax advantages.

Cons of leasing:

  • You must return the car at the end of the lease, unless you prefer to buy it outright.
  • Any major, irreversible car modifications usually aren't permitted.
  • Miles driven are typically limited — often to no more than 12,000 a year — and costly fees usually apply to any excess.
  • Stained or torn seat coverings, paint scratches or dents could result in charges for excessive wear and tear.
  • Ending a lease early may cost almost as much in early-termination fees as finishing the term.
  • Insurance can be more expensive since coverage of the difference between the car's value and the amount owed on it is required.

Buying a car

The basics:

If you finance a car purchase, you'll start building equity in the vehicle as you make payments. Equity is the car's market value minus the amount owed on it. Once the loan is paid off, your equity interest will equal its resale value. A lender may require a down payment, and other upfront costs may be higher compared to those associated with a leased car.

Pros of buying:

  • Once the loan is paid off, you can drive for years with no payments.
  • There's no financial penalty for driving too many miles a year.
  • You can customize or modify the car as desired.
  • No concerns about charges for every spill or ding.
  • Insurance costs may be lower.
  • You can sell the car any time without a penalty.

Cons of buying:

  • You may not be able to afford as much car for your financing dollar.
  • A larger down payment may be required.
  • Long-term resale value is uncertain, and the amount you owe could at times be higher than the car's value.
  • The eventual hassle of selling is your responsibility.
  • Maintenance expenses are all yours.
  • Any wear and tear or excessive use reduces the car's resale value.

The bottom line

Those who don't mind never-ending car payments and crave a new ride every few years might prefer leasing. On the other hand, buying may better suit those who don't want to make payments forever, those who log more miles on their car than a lease would typically allow, and those who don't mind driving an older car after a few years. Ultimately, whether it's best to buy or lease depends on your personal preferences and financial situation.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved