Leasing vs Buying a Car: The Pros and Cons of Each

What can make buying a car better than leasing? Although there’s been a shift toward leasing in recent years, about two-thirds of consumers still choose to buy their cars.¹ Let’s first look at what they gain—and then what it costs them.

Financial Pros

• If you are open to keeping your car for longer than three years, experts say that buying is less expensive over the long-term.² Several factors shape that reality, the most significant of which is that once you’ve paid off a car loan you can keep driving without the burden of a monthly payment.
• If you have a mediocre or poor credit history, you’ll probably find it easier to qualify for a loan than for a lease.³
• Once you pay off your loan, you own the car. Even allowing for depreciation, you have an asset that you can sell or can use as a trade-in on your next car.

Lifestyle Pros

• You can drive the car as much as you like, without mileage limits or penalties. And you can drive anywhere you like, including out of the country.
• You can modify the car as you please. Do you want pink polka dots on the hood? Lights on the wheels? A top-of-the-line stereo system? Go for it!

Financial Cons

• Monthly loan payments are typically more expensive than lease payments. That’s even more likely if you don’t have excellent credit.
• If you own the car, you’re responsible for all related costs—including maintenance and repairs. If you keep a car after its warranty has expired, those costs can add up.

Lifestyle Cons

• If you covet the latest and greatest technology, you’ll have to be patient. If you keep a car longer than three years, newer cars on the road will almost certainly have bells and whistles that your car does not.

Generational differences among buyers and changes in the auto industry have driven substantial growth in leasing.

Let’s start with the buyers. Proportionally, millennials—more than any other age group—choose to lease.⁴ And that seems unlikely to change given research showing that only 15% of millennials think it’s “extremely important” to own a car.⁵

Parallel to that shift, the auto industry’s approach to leasing has changed. A 2018 report by Cox Automotive, an industry research firm, compared leasing in 1999 to today.⁶ Leasing then was used most often to unload cars that weren’t selling and targeted consumers who otherwise couldn’t get financing. Today, just the opposite is the norm. Those factors contributed to a greater than fourfold increase in lease originations between 2009 and 2016.⁷

So, what makes leasing a car worth it? What are the advantages of leasing a car—the appeal of leasing to consumers? And what are the pitfalls?

Financial Pros

• In the short-term, leasing is less expensive than buying. The average monthly lease payment is 23% lower than the average loan payment.⁸ So, you can save money or, if you shop carefully, you may get a nicer car or one with more options for the same monthly payment.
• All maintenance and repairs are typically covered by the lease, so costs are fixed and there are fewer surprise expenses.

Lifestyle Pros

• Most leases are for three years, so unless you opt out of a car altogether you can count on having a new one that often. Not only can you enjoy that new-car smell, but you’ll also have the most recent technology and safety features.
• At the end of the lease, you can just turn the car back in. That saves you the hassle of ongoing maintenance and/or having to sell it.

Financial Cons

• If you have poor credit, leasing may not be an option. According to a major credit bureau, the average credit score for consumers starting a new lease in 2017 was 722.⁹
• Leasing is more complicated than buying, which means you’ll be exposed to a range of additional costs that may include a security deposit, an acquisition fee, and a capitalization reduction. You may also be required to buy more insurance coverage than you would choose on your own, including gap insurance (which pays out in the event there is a difference between the market value of the car and what you owe on the lease, should the car be stolen or deemed a total loss).
• Leasing is not completely flexible. If you want to end a lease early, you may pay a termination fee. And if you drive more than the mileage limit of your lease (typically 30,000 to 36,000 miles over three years), or inflict more wear and tear than allowed, you may end up owing money at lease end.

Lifestyle Cons

• Because you don’t own the car, you can’t customize it. And some leases restrict where you can drive the car—you may not be able to take it out of the country, for example.