Buying a car can be an exciting experience, but before you head to the dealership, you should decide if you want to purchase, lease, or finance your new ride. Each option has its pros and cons, and some are more budget-friendly than others.
In this guide, we’ll explain the difference between leasing vs. financing a car and answer some common questions to help you figure out whether leasing or buying is a better choice for your situation.
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How Does Buying or Financing a Car Work?
Buying a car means you pay for the full cost of the car in cash, whereas financing a car means you purchase the vehicle with a loan and pay it off over time. When you buy or finance a car, the car is yours to keep for as long as you want.
Here’s how financing works: You put some money down on the vehicle, and you finance the rest with a loan. When you apply for a loan, you’ll secure an interest rate, which is based on your credit score. Each month, you make a payment that goes toward the principal and interest, until the loan term is up. As you make the payments, you build equity in the vehicle.
Once your auto loan is fully paid off, you become the legal owner of the car. You never have to give it back, and you have complete control over keeping or selling the car.
What Are the Benefits of Financing a Car?
Financing a vehicle is a good option for many drivers, especially if you don’t care about driving the newest vehicles. Here are some of the benefits of financing a car:
- No mileage limit: Unlike leasing, you don't have to keep an eye on the mileage when you buy or finance a car. You can put as many miles on your vehicle as you want, with no restrictions or fees.
- No wear and tear charges: When you finance a car, the vehicle is yours. You don't have to worry about getting charged for wear and tear, which can happen with a lease.
- Resell or trade in the car when you want: Buying allows you to resell or trade in your car whenever you want. Plus, you can use the money from selling your car as a down payment on your next vehicle.
What Are the Drawbacks of Financing a Car?
Buying a car has its downsides. Below are some of the most notable drawbacks you should consider before you take out a loan.
- Higher monthly payments: When you finance a car, the monthly payments are usually much higher than lease payments. If you’re on a tight budget, leasing might be a cheaper option.
- Limits your vehicle options: Because financing a car is more expensive than leasing upfront, it might limit the types of vehicles you can realistically afford.
- Cost of maintenance: Financing a car means you’re responsible for all maintenance costs. With a lease, most of these costs are covered. If you’re planning to finance a car, make sure to budget for these costs to avoid surprises in the future.
How Does Leasing a Car Work?
Leasing a car allows you to drive a brand-new vehicle for a specific length of time, usually between two and three years. You make an upfront payment to cover the fees and taxes of a new vehicle, then you pay a monthly fee over the duration of the lease term. With a lease, you’re subject to certain limitations, such as a maximum mileage.
Because lease payments tend to be lower than auto loan payments, leasing allows you to drive a more expensive vehicle that you may not be able to afford to finance.
At the end of the lease period, you have the option to return the vehicle and lease a new one, or you can purchase the leased vehicle and make it yours. But unlike buying a car, there’s often less room for negotiation when you buy a lease.
What Are the Benefits of Leasing a Car?
If you’re looking for an affordable way to get into a new vehicle, leasing might be a great choice. Here are some of the perks of leasing.
- Lower monthly payments: Compared to financing a car, leasing has the benefit of lower monthly payments. If you’re car shopping on a limited budget, leasing could potentially be a cheaper option.
- No-cost maintenance: Most leased vehicles have a bumper-to-bumper warranty, which means you aren’t responsible for maintenance during the leasing period. If something unexpected goes wrong, the warranty usually covers most of the cost.
- Always drive a new vehicle: One of the biggest draws of leasing is that you can get into a brand-new car every few years. If you’re the type of driver who enjoys having a new ride with the latest technology, leasing is a great option.
What Are the Drawbacks of Leasing a Car?
Leasing has a number of drawbacks, and it’s not the best option for everyone. Consider these factors before you sign a lease agreement.
- Mileage restrictions: Almost every lease restricts the number of miles you can put on the car over the lease period. Mileage restrictions often range from 10,000 miles to 15,000 miles per year. If you exceed the mileage limit, you’ll get charged a fee when you return the car. Usually, the fee is somewhere between 10 and 25 cents per mile over the limit.
- Wear and tear fees: When you return your lease, the dealer will evaluate the car for wear and tear. If there are any scratches, dings, scrapes, or tears, the dealer will probably charge you a penalty fee. You must keep your leased vehicle in excellent condition to avoid paying unnecessary fees.
- You don't own the car: One of the biggest downsides of leasing a vehicle is that you don't build equity in the car. You must return the car when the lease expires unless you choose to purchase the vehicle outright.
- Leasing becomes more expensive over time: When you lease cars consistently, it essentially means you’re always paying to rent a vehicle for a few years. At a certain point, you’ll spend more on leasing a car than you would to purchase a new vehicle.
- Ending a lease early can be expensive: If you realize you can’t afford your lease payments, or you simply don’t love the car, ending a lease early will cost you a big chunk of money.
What Factors Should I Consider When Leasing or Buying a Car?
There are many pros and cons to buying and leasing a car. The best option for you might not be the best option for another driver. Here are the main factors to consider when determining whether to buy or lease a car.
- Your budget: When choosing between a lease vs. buying a car, one of the most important things to consider is your budget. Leasing is usually more affordable than financing. However, buying a car gives you ownership of the vehicle, so you can recoup the money by reselling it later.
- How often you drive: If you drive often, take long road trips, or have a long commute to work, think twice before getting a lease. Leases have mileage restrictions, and if you surpass the limit, you’ll get charged for each mile over when you return the car.
- How often you want a new car: If you love having a new car, a lease might be a good option for you. It allows you to drive a brand-new car every few years. On the other hand, if you don’t mind driving an older car, financing a car is almost always cheaper in the long run.
Comparing Financing vs. Leasing a Car
In the table below, you can see a side-by-side comparison of leasing vs. buying a car based on several key factors.
Leasing | Buying/Financing | |
Ownership | You don't own a leased vehicle, and you don’t build equity. You must return the car to the dealer when the lease expires. | Buying a car gives you full ownership rights of the vehicle. You can keep it for as long as it serves its purpose and sell it at any point. |
Upfront costs | The upfront costs of leasing include the first monthly payment, acquisition fee, refundable security deposit, taxes, and potentially other costs. | When you buy a car, you pay the down payment upfront, as well as taxes and registration fees. |
Monthly payment | Lease payments are usually lower than monthly auto loan payments. | You almost always pay a higher monthly fee when you finance a car. |
Returning the car | You return the vehicle to the dealer at the end of the lease period and decide whether to buy the car or sign another lease agreement. | You decide when to sell the vehicle or exchange it for a new car. |
Customization | In most cases, you can’t make any customizations to a leased car. | As the vehicle owner, you are free to modify the vehicle however you choose. |
Mileage | Leased vehicles have mileage restrictions. Most dealers set the maximum mileage at 10,000 to 12,000 miles per year. If you go over the mileage, you pay a fee. | You can drive your vehicle as far as you want without worrying about exceeding mileage limits. |
Frequently Asked Questions About Vehicle Leasing vs. Buying
How Much Down Payment Do I Need When Leasing a Car?
When you lease a car, you aren’t usually responsible for putting any money down upfront. Unlike with an auto loan, making a down payment on a leased car won’t reduce your monthly payment by much. On the other hand, making a big down payment on a financed car will lower your monthly payment.
Do You Need Car Insurance for a Leased Car?
Yes, you must have car insurance on a leased car in almost every state. Car insurance is required for most drivers, regardless of whether their car is leased or financed. In addition, many lenders require you to have a full coverage auto insurance policy if you lease a car.
Can I Use a Leased Car for Business Travel?
Legally speaking, you are allowed to use a leased car for business travel. In fact, you might be able to write off a leased car on your taxes if the car is used primarily for business purposes. However, be aware of the mileage restrictions of a lease. If you drive far distances for work, you may have to pay a penalty fee if you exceed the mileage limit by the end of the lease term.
Can I Negotiate a Lease Payment?
Car salespeople are often willing to negotiate a lease payment. You can also negotiate other aspects of a lease, like the interest rate and mileage limit.
What Is the Maximum Mileage I Can Put on a Leased Car?
The standard mileage limit for a lease is 10,000 miles per year, but some leases set the mileage limit between 12,000 and 15,000. However, keep in mind that a higher mileage limit will probably result in a higher monthly payment.
Elizabeth Rivelli
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
