Leasing versus Buying: Which is right for you?


You want a new car and have an idea of what you want to purchase. Now you must decide how you will buy the vehicle. Unless you are paying cash, some form of financing is required, and you must choose between a traditional loan or a lease. Here are the pros and cons of each option to help you make the right choice for your situation.

When Buying Is the Best Choice

Banks and dealers both offer loans with competitive rates. You will qualify for the car you want, based primarily on your income and credit score. A simple application and required verifications can get you in a vehicle often in a few hours. Most loans charge a fixed rate of interest for a term of three to seven years. Extending the loan further will give you lower monthly payments but result in higher overall costs.

Down payment requirements vary based on qualifications. Those with excellent credit may need minimal down payments while poor credit may require several thousand dollars. Lower credit scores also increase interest rates and can lead to much higher loan fees. The lending institution will hold the car’s title until paying the contract in full. Selling the vehicle before payoff requires the assistance of the lender and a release of the title to the buyer.

Buying is best for owners who keep the vehicle until payoff and beyond. When buying a car, the loan process is simple, and the costs are relatively transparent.

When Leasing is the Best Choice

A lease also requires the completion of a credit application and qualifying for the lease with your credit score largely dictating the terms offered. Leases can range from a year to four or five years with the three-year lease being the most recommended.

Upfront costs typically require higher down payments, resulting in lower monthly payments for the lease term. At the end of the lease, you will return the vehicle to the dealer with a buyout option.

Most auto lease terms will allow you to drive the vehicle 12,000 miles a year with a surcharge for going over. If you notice that you are driving more than that, ask for an extension to 15,000 to 18,500 miles at an additional cost. Driving more miles may raise your monthly payments, but will reduce fees charged when the lease ends.

Your contract will contain a residual price, and once the contract ends, you may choose to buy the car for this residual price. If you decide to return the vehicle to the leasing company at the end of the contract, they may charge for wear and tear or failed maintenance. If the vehicle is perfectly maintained, you may receive your security deposit back. Most buyers find they owe additional fees when the lease terminates.

Leasing is a good option for buyers who do not drive many miles, follow the car maintenance schedule and like to trade up every couple years.