Getting a new vehicle is an extremely exciting milestone, but before choosing an SUV or truck in black or red, you must first decide whether to lease or buy your next ride. Leasing or buying comes down to three main factors: the miles you expect to drive, the amount of money you are willing to spend and the purpose of the vehicle.
Leasing a car
When you lease a car, you pay for the right to drive the vehicle for a fixed period — typically three or four years. Most leases are financed through the dealer.
You will usually pay an initial amount to drive your new vehicle off the lot to cover a range of taxes and fees. From there, you’ll make monthly payments over the life of the lease to cover the costs of depreciation of the vehicle. There are typically restrictions on the number of miles you can drive the car during the lease term, and you have to return the vehicle to the dealer in excellent condition to avoid extra fees.
Benefits of leasing a car
- Lower payments. If you’re trying to keep your monthly spending in check, leasing a car tends to offer the perk of making lower payments on a newer car than if you were buying it.
- Less money down. In addition to what you pay throughout the lease, the initial sticker shock may not be as bad: You might be able to drive off the lot without putting any money down.
- Manufacture warranty options. While you have the keys, you will likely enjoy the benefit of warranty protection, which typically lasts for the first three years or 36,000 miles.
Drawbacks of leasing a car
- Mileage restrictions. Leasing may make it financially easier to put you in the driver’s seat of a new car, but you won’t be fully in control. Most leases come with annual mileage restrictions, typically ranging between 10,000 and 15,000 miles. If you exceed those limits, you’ll pay a premium — typically around 30 cents per mile.
- Additional costs. Aside from excess mileage fees, there are also fees for any wear-and-tear that’s considered “excess” — which can include that chip in the windshield from a truck that didn’t have its mud flaps completely cleaned off.
- You won’t own it at the end. Unless you choose a lease buyout — which will likely involve financing anyway — your monthly payments will continue when you either renew your lease or lease a new vehicle. This means you’re never without payments and never fully own the car.
Who is leasing best for?
Leasing is the right option for you if you want to get behind the wheel of a vehicle without a substantial financial commitment upfront. Unlike financing a vehicle through an auto loan, leasing eases the monthly cost to a more manageable number. It also allows you to drive a more luxurious vehicle that you might not be able to otherwise afford.
But keep in mind the mileage restrictions and potential excess wear-and-tear charges that come along with leasing. If you have long road trips in your future, leasing might not be right for you.
Buying a car
Buying a vehicle means you maintain possession of the car instead of leasing it for a few years. If you’re looking for a brand-new car, it can have a big price tag too. The average cost of buying a new vehicle in December 2021 was over $47,000, according to data from Kelley Blue Book.
There are other more affordable options for buying a car, though, including certified pre-owned vehicles and used cars. For new cars purchased with a loan, the price tag for your monthly payments is typically higher versus leasing. However, the vehicle is officially yours once the vehicle is paid off.
Benefits of buying a car
- No mileage limits. When you buy a car, you won’t have to keep an eye on your mileage. If you want to drive across the country or rack up 100,000 miles in a year, you can do so without worrying about extra fees.
- No wear-and-tear charges. In addition to a lack of mileage restrictions, you won’t have to worry about what a dealer deems as “normal wear and tear,” which is a concern for anyone who leases or needs to pay for potential repairs at the end of a lease.
- The ability to sell or trade in the vehicle. Because the car is yours, you won’t need to think about what to do when your auto loan is paid in full. When you’re ready for a new car, truck or SUV, sell it or trade it in at its current market value based on mileage and condition.
Drawbacks of buying a car
- Higher monthly payments. When you buy a car, you’re probably going to spend more each month. For example, the average monthly payment for those who bought a Jeep Grand Cherokee was $608 — $138 more than an average monthly payment for leasing it, according to Experian’s State of the Automotive Finance Market report issued in the third quarter of 2021.
- A bigger down payment is required. If you put more money down, of course, you can reduce the size of how much you need to borrow and — by extension — those monthly payments, but it will take a bigger chunk of your savings.
- Long-term maintenance costs. Lastly, owning a car comes with the same mix of pride and potential problems as owning a house: It feels good to say you own it until you have to pay to fix it when something breaks.
Who is buying best for?
If you prefer to be in total control when it comes to your vehicle and finances, buying might be best for you. You won’t have to worry about mileage restrictions or possible additional charges for things like wear and tear. Although buying or financing your vehicle through a loan takes some extra homework, you will have full reign of the vehicle and can sell or trade in at any time — a benefit that leasing cannot offer.
Whether you choose to lease or buy a car it’s important to remember a few key factors ahead of time, so you walk away with the best deal. Your credit score serves as the primary measure of your ability to afford your monthly payments. Aim for a score between 680 and 739 for leasing, and 661 or higher if you choose to buy. Also consider the time of the month, year or even week when you decide to head to the dealership.
The bottom line
Determining whether you should lease or buy a car depends on a careful assessment of your personal finances and your driving habits. Think about how much you can comfortably afford to pay upfront each month and consider how many miles you spend on the road to figure out the most cost-effective way to hit the highway. When you know what kind of car you want, crunch the numbers with Bankrate’s lease versus buy calculator to figure out the best financial move.