• Mortgages
    Get the Best Rates
    • Mortgage rates
    • Refinance rates
    • Post FED Announcement Rates
    • 30-year mortgage rates
    • 15-year mortgage rates
    • 20-year mortgage rates
    • 10-year mortgage rates
    • Mortgage lender reviews
    Use Calculators
    • Mortgage calculator
    • How much house can you afford?
    • Mortgage refinance calculator
    • Mortgage payment calculator
    • Amortization calculator
    • All mortgage calculators
    Get Advice
    • FED announcement impact on rates
    • What to know about reverse mortgages
    • Home buying guide
    • Refinance your mortgage
    • First-time homebuyer loans and programs
    • Prepaying your mortgage
    • Your guide to FHA loans
    • Everything to know about VA loans
  • Homes
    Home Buying
    • Determine your budget
    • Find your home
    • Get prequalified
    Get Advice
    • Step-By-Step Homebuying Guide
    • First-Time Homebuyer's Guide
    • How Does Rent-To-Own Work?
    • What To Look For When Buying A Home
    • Homebuyer Mistakes To Avoid
    Learn How To
    • Make An Offer On A House
    • Decide Between Renting vs. Buying
    • Ace the Final Walk-Through
    • Find The Best Real Estate Agent
    • Buying A Second Home
    Use Calculators
    • How Much House Can I Afford?
    • Rent Vs. Buy Calculator
    • Cost of Living Calculator
    • How Much Should I Put Down?
  • Banking
    Compare Accounts
    • CD rates
    • Savings accounts
    • Money market accounts
    • 1-Year CD rates
    • 3-Year CD rates
    • 5-Year CD rates
    • Checking accounts
    • Bank ratings
    Use Calculators
    • Savings calculator
    • CD calculator
    • Compound savings calculator
    • All banking calculators
    Get Advice
    • How to save money
    • Federal Reserve news
    • What is a money market account?
    • Which certificate of deposit account is best?
    • How to open a savings account
    Bank Reviews
    • Capital One Bank
    • Marcus by Goldman Sachs
    • American Express National Bank
    • CIT Bank
    • Synchrony Bank
    • Barclays Bank
    • All Bank Reviews
  • Credit Cards
    Compare by Category
    • Best Credit Cards of 2019
    • Rewards
    • Travel
    • Airline
    • Cash Back
    • No Annual Fee
    • Balance Transfer
    • 0% APR
    • Business
    • Student
    Compare by Credit Needed
    • Excellent Credit
    • Good Credit
    • Fair Credit
    • Bad Credit
    • No Credit History
    • Secured Credit Cards
    Compare by Issuer
    • American Express
    • Bank of America
    • Capital One
    • Chase
    • Citi
    • Discover
    • Wells Fargo
    Get Advice
    • Credit Card Reviews
    • Credit Card Payoff Calculator
    • Balance Transfer Calculator
    • All Credit Card Calculators
  • Loans
    Compare Lenders
    • Personal loan rates
    • Personal loan reviews
    • Auto loan rates
    • Student loan rates
    • Student loan reviews
    Loan Types
    • Personal loans
    • Auto loans
    • Debt consolidation loans
    • Home improvement loans
    • Student loans
    • Medical loans
    • Bad credit loans
    Use Calculators
    • Loan calculator
    • Auto loan calculator
    • Personal loan calculator
    • Auto refinance calculator
    • Loan payment calculator
    • Student loan calculator
    • All calculators
    Get Advice
    • Student loans guide
    • Refinancing student loans
    • Refinancing personal loans
    • Refinancing auto loans
    • How to get a personal loan
    • Personal loan origination fees
  • Investing
    Best of
    • Best Investments
    • Best online brokers for stocks
    • Best online brokers for beginners
    • Best online brokers for mutual funds
    Brokerage Reviews
    • TD Ameritrade Review
    • Merrill Edge Review
    • Ally Invest Review
    • Fidelity Review
    • Charles Schwab Review
    • Vanguard Review
    • Interactive Brokers Review
    • Robinhood Review
    • Tradestation Review
    • E*Trade Review
    • WellsTrade Review
    • All Brokerage Reviews
    Use Calculators
    • Investment Earnings Calculator
    • Annuity Calculator
    • All Investing & CD Calculators
    Get Advice
    • Compare Online Brokerages
    • What is the long-term capital gains tax?
    • Passive income: What it is and 5 ideas for 2019
    • How to buy stocks
  • Home Equity
    Compare Lenders
    • Home equity loan rates
    • Home equity line of credit rates
    • Home equity lender reviews
    Use Calculators
    • Home Equity Calculator
    • Loan vs. Line Of Credit Calculator
    • Debt consolidation calculator
    • HELOC payoff calculator
    • All home equity calculators
    Get Advice
    • What is a home equity loan?
    • HELOC vs. Home equity loan
    • Consolidate your debt using home equity
    • Home equity loans with bad credit
  • Insurance
    Insurance Types
    • Car insurance
    • Homeowner's insurance
    • Health insurance
    • Life insurance
    Best of
    • Best Car Insurance Companies
    • Best Home Insurance Companies
    • Best Cheap Car Insurance
    • Top Car Insurance Comparison
    Company Reviews
    • Geico Insurance
    • State Farm Insurance
    • Progressive Insurance
    • Allstate Insurance
    • Liberty Mutual Insurance
    • Nationwide Insurance
    • The General Insurance
    • Farmers Insurance
    • American Family Insurance
    • Erie Insurance
    • Amica Insurance
    • Travelers Insurance
    Insurance by State
    • Car Insurance California
    • Car Insurance Florida
    • Car Insurance Georgia
    • Car Insurance Michigan
    • Car Insurance New Jersey
    • Car Insurance New York
    • Car Insurance North Carolina
    • Car Insurance Pennsylvania
    • Car Insurance Texas
    • Home Insurance Florida
    • Home Insurance Texas
  • Personal Finance
    Compare
    • Current interest rates
    • Compare rates
    Use Calculators
    • Debt consolidation calculator
    • Net worth calculator
    • Personal finance calculators
    • Cost of living calculator
    • All calculators
    Get Advice
    • Retirement advice
    • Debt management
    • Improve your credit score
    • Career resources
    • Tax advice
    • Insurance basics
    • Real estate tips
    • Personal finance glossary
  • Retirement
    Get Advice
    • Best Roth IRA accounts
    • Best retirement plans
    • How to open a Roth IRA
    • 401(k) rollover guide
    • Roth IRA vs. Roth 401(k)
    Use Calculators
    • 401(k) retirement calculator
    • Retirement savings calculator
    • Roth IRA calculator
    • IRA minimum distribution calculator
    • Social security benefits calculator
    • All retirement calculators
    More Information
    • What is an IRA?
    • What is a Roth 401(k)?
    • 401(k) contribution limits
    • Contributing to IRA during retirement
    • Best age for Social Security retirement benefits
    • Roth IRA 5 year rule
  • Create Account
  • Dashboard
  • Alerts
  • Settings
  • Support
  • Logout
Share

Leasing vs buying a car

Michele Lerner
March 19, 2013  in  Auto Loans

1 of 2

Lease vs buy my next car?

If your clunker of a car is gasping its final breath, you are probably in the midst of deciding whether to lease a car.

There are pros and cons to either leasing or buying, but financial experts say buying and keeping a new car for the long term is usually the better deal. No matter which scenario works best for your individual needs, you should negotiate the deal, says Dayana Yochim, a consumer finance expert in Alexandria, Va.

“First negotiate the price of the car, then negotiate the trade-in value — if you have a car to trade — and then you can talk about how you want to finance the car,” Yochim says. “Even with a lease, everything is negotiable.”

Here are six things to think about when debating whether to lease vs buy your next car.

Is your car-buying budget tight? | © WavebreakmediaMicro / Fotolia

If your first priority is to keep your monthly car payments within a tight budget, leasing may be the better option.

“Lease payments are typically less costly than buying a car,” says Scott Michalek, a senior financial adviser with Wescott Financial Advisory Group in Philadelphia. “Your monthly payments will be cheaper, but when you walk away at the end of the lease, you won’t have anything to show for it.”

Michalek says leasing makes sense for someone on a very tight budget, but he warns that breaking a lease can be extremely expensive.

“If you can’t afford to make your lease payments or you want to end your lease early because you are relocating, you’ll pay a hefty penalty,” Michalek says.

Michalek says a lease contract typically will state that all remaining lease payments are due. So, if your lease payment is $300 per month and you want to return the car six months early, you will owe the remaining $1,800 of lease payments. You’ll also be charged an early termination fee, typically $200.

Some dealers may be willing to work with you on reducing these costs, but don’t count on it. If you need to terminate your lease, you may want to consider transferring your lease to someone else who’s looking for a short-term car lease. LeaseTrader.com and Swapalease.com facilitate these types of lease transfers.

Do you have shiny or banged-up credit? © diego cervo / Fotolia

Yochim recommends checking your credit three to six months before you start shopping for a new car so you have time to correct any errors on your credit report and to take steps to improve your credit score if you can.

Michalek says bad credit will hurt whether you buy or lease a car, but it will hurt more on the lease side. “If your credit is really bad, you may not be able to lease at all, because dealers typically only lease to consumers with good credit,” he says.

Even consumers with bad credit can usually finance a car purchase, although they won’t get the best interest rates, Michalek says.

Pete D’Arruda, president of Capital Financial Advisory Group LLC in Cary, N.C., recommends saving money so you can make a bigger down payment and borrow less in order to reduce the interest costs.

“You may need to go down a little in the quality of the car you choose if your credit makes the cost of borrowing too expensive,” D’Arruda says.

Are you a road hog or mileage hoarder? © Joyce Marrero/Shutterstock.com

The typical car lease imposes a penalty on miles driven above an annual limit such as 15,000 miles.

“Some leases now limit you to 10,000 miles per year, so a lease really only makes sense if you don’t intend to drive the car much at all,” D’Arruda says.

If you have a long commute or frequently take long-distance vacations by car, you may be better off buying.

“If you lease your car, you won’t be as free to be spontaneous about road trips,” says Yochim. “Look at your current driving habits, and estimate how many miles you drive per year to make sure you won’t exceed the limit.”

Yochim says car leases are negotiable, so you may be able to negotiate a reduction in the excess mileage penalty or an increase in the number of allowable miles. Just be sure to negotiate this at the beginning of your lease because it’s unlikely you can change the terms when you turn in the car.

The Bankrate Daily

2 of 2

Diligent about car maintenance? © antiksu / Fotolia
Diligent about car maintenance?

While it may seem like maintenance is a bigger issue for drivers who intend to keep their car for years, the truth is car maintenance is necessary for any car owner whether you buy or lease.

“Since most leases last for three years, your car will always be under warranty, so you won’t face major repair bills,” says Michalek. “On the other hand, if you own your car, you can scratch it, dent it and rip up the interior without worrying about it. If you lease a car, you must return it in excellent condition. Otherwise, you’ll have to pay a penalty.”

Michalek says a car lease may not be a great choice for a family with young children or pets because of the increased likelihood of damage to the car.

Whether you lease or own, you need to keep good records of your routine car maintenance to make sure your warranties stay valid.

“Leasing is best for fastidious people because you’ll pay a penalty for every stain and ding when you return it,” Yochim says.

Are you cash poor? © Mirco Vacca/Shutterstock.com

If you lack a car to trade in and don’t have the cash for a down payment, a lease may be your only option.

“Most car dealers won’t offer 100 percent financing and will require either a trade-in or a down payment of 10 percent or 20 percent,” Michalek says. “But be careful on a lease, too, because the advertised low monthly payments usually require a down payment.”

D’Arruda says consumers should never tell the dealer their car payment budget. “Negotiate the price of the car first as if you are buying it, then tell them you want to lease it,” he says. “You’ll get a better deal that way.”

Yochim says consumers often make a down payment to reduce their monthly payments, but she says they should never put cash into a car lease arrangement.

“A lease is like long-term renting. You’re not building any equity,” she says. “At least if you are purchasing the car, you’re not throwing away your cash on rent.”

Love that new-car smell? © Andres Rodriguez / Fotolia

If you prefer to drive a new car every few years, a lease may make sense as long as you are not in danger of going above the mileage limitations, D’Arruda says.

Yochim says the best option for a consumer’s long-term finances is to buy a used car that’s in good shape and drive it until it no longer moves. “By buying it used, you avoid that instant depreciation of a new car. That said, it’s harder right now to find a decent used car at a fair price because a lot of people have been choosing to drive their cars longer in recent years,” she said.

RATE SEARCH: Compare car loan rates

With leasing, Michalek says most of the advantages of leasing are personal.

“If you want to drive a new car as often as possible and don’t want to think about having a car that’s not under warranty, then leasing is definitely convenient,” he says. “Financially though, 9 out of 10 times you’re better off purchasing a car and keeping it for five years or longer.”

Related Links:
  • Top 10 check-engine-light car repairs
  • How much does it cost to rent a car?
  • When is the best time to buy a car?
Related Articles:
  • 9 trucks that hold value
  • Maintaining your car
  • Car lease contract basics

You may also like

  • Pros and cons of taking over car lease payments

  • Get auto loan quotes, then shop for a car

  • How to detect a car loan modification scam

  • Keys to leasing

  • Leasing laws you should know

  • Top 10 leasing booby traps

  • About Us
  • Press Room
  • Contact Us
  • Careers
  • Advertise With Us
  • Latest News
  • Popular Topics
  • Glossary
  • Compare Rates
  • Understand Bankrate's Averages
  • Privacy Policy / Your California Privacy Rights
  • Terms of Use
  • GLBA Annual Notice
  • Licenses
  • Sitemap
How we make money

Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.

Maximize Your Money. Get Expert Advice & Tools. Master Life's Financial Journey.

You have money questions. Bankrate has answers. Our experts have been helping you master your money for four decades.

Our tools, rates and advice help no matter where you are on life’s financial journey.

Facebook logo Twitter logo
Follow Us

Bankrate, LLC NMLS ID# 1427381 | NMLS Consumer Access
BR Tech Services, Inc NMLS ID# 1743443 | NMLS Consumer Access
© 2019 Bankrate, LLC a Red Ventures Company All Rights Reserved.

United States United Kingdom