When it’s time to get a new car, you have a choice to make: Will you buy or lease your next vehicle?
Dealerships and leasing companies may sing the praises of low monthly payments for leased cars, but there’s a little more to consider before you make your choice.
So how do you know whether to go for a leased car or to buy your own? Your personal finances, car driving habits, and lifestyle choices all factor into choosing to lease or buy a car.
Don’t forget auto insurance while you’re comparing prices. Car leases come with their own insurance requirements, and states set required minimums for car owners, too.
How Leasing a Car Works
A car lease is like a long-term car rental. You’ll get to drive a new car for a set term, usually around 36 to 48 months. At the end of the lease period, you can return your car for a new lease, buy the car you leased from the dealer, or purchase a vehicle elsewhere.
The process to lease a car looks a lot like buying a car: you’ll need to research car makes and models, test drive a few options, compare prices, and ultimately negotiate with the dealer.
To understand how to get the best lease deal, you need to know how lease pricing works. Car lease prices can be broken down into several parts:
- MSRP: MSRP, or the Manufacturer’s Suggested Retail Price, is a non-negotiable number. This refers to how much the car manufacturer suggests selling the vehicle for.
- Sale price (capitalized cost): This is what you actually end up paying for the vehicle, including the dealer’s markup on the price. This price is negotiated.
- Money factor: Also called a lease factor or lease fee, the money factor is used as part of the lease payment calculation. The goal of the money factor is to account for depreciation on a leased vehicle and acts similarly to interest rates on a car loan. While the money factor is set by the manufacturer, dealerships can mark it up, so make sure to ask if you’re getting the base rate during your negotiation.
- Residual value: Once a new car hits the road with its new driver, the value starts depreciating. Vehicle depreciation is most severe for new cars, and the residual value is how much your car will be worth at the end of your lease term.
- Sales tax: Even though you don’t own your leased car, you’re still subject to sales tax on a portion of each monthly payment. Of course, you can’t get out of this one, but the amount depends on how well you negotiate other factors.
Dealerships put all of this information together to come up with a monthly lease payment. When it comes time to negotiate a lease price, keep these factors in mind to get the best deal.
Once you settle on a car and price, you can sign the car lease contract and take your new leased car home.
Pros and Cons of Leasing a Car
| Pros | Cons |
| Lower monthly payments | Total cost is more expensive than buying over a long period of time |
| Drive a new car every few years | More required car insurance than owning |
| Warranty usually covers maintenance | No asset at the end of a lease term |
| Don’t have to worry about reselling | Mileage limits restrict how much you can drive |
The main benefits of leasing a car are that you can get lower monthly payments than with an auto loan within a lease period and that you can drive a new car every couple of years.
However, the total cost of leasing isn’t a great deal for the average driver. For one, the payments never stop. When you get into a cycle of leasing cars, you end up paying much more than you would with just a six-month car loan.
When you compare the price of a three-year lease to a six-year car loan, the monthly costs might look more reasonable with a lease. But if your budget is a concern, it’s important to look beyond repayment terms. At the end of the lease term, you can exchange your leased vehicle for another or buy it from the company—after you’ve made payments on the vehicle. After six years of paying car payments, you own your vehicle and can continue driving or resell it.
Most leases don’t require a down payment, but this can depend on your credit score. This could still be less than what you’d need to pay to purchase a car, though.
Insurance for Leased Cars
Your car insurance can cost more when you lease a car, too. This is because of the required and recommended car insurance coverages that are particular to car leases. Since the dealership retains ownership of the vehicle, your lessor needs to make sure its property is protected.
- Gap insurance: Much like owning a new car, lessees run the risk of totaling a car for which the remaining payments exceed the actual cash value of the car. And if you owe more on your lease than your car is worth, you’ll be responsible for paying the difference. Some lease contracts include gap coverage, but if yours doesn’t, this is a good add-on to consider.
- Comprehensive and collision insurance: Almost every state has its own minimum requirement for liability insurance, but comprehensive and collision insurance are typically optional add-on coverages. But when you lease a car, there’s a good chance your lessor will require you to purchase this additional coverage that pays up to the actual cash value of the car when fault can’t be assigned to someone else. This can mean you’re at fault in an accident or that an act of God, like a falling tree, damages your vehicle.
Getting the right insurance coverage for a leased car can be more expensive than when you own, but you can still shop around to find the best deal.
Pros and Cons of Buying a Car
| Pros | Cons |
| Less expensive total cost | Maintenance warranty eventually expires |
| No mileage limits | More expensive to drive a new car every few years |
| Own a vehicle at the end of your auto loan | Monthly loan payments can be more expensive than lease payments |
| Can save money on car insurance |
Buying a car can be a little more expensive up front compared with leasing. For one, you’ll need to put some kind of down payment on the vehicle, and your monthly auto loan payments could be more expensive than a lease payment.
But over a longer period of time, the tables start to turn, and you have a little more financial power. Paying off your auto loan on time or early means you own your car outright, usually within six years. After this the car is yours.
That means two things for you: your monthly car loan payments have suddenly disappeared, and you now have an asset you can sell for its actual value. Money-conscious drivers should keep this in mind when comparing loan costs to lease payments.
As a car owner, you have total control over how you use and protect your car. For example, where car lessees have to worry about mileage limits, you can save the odometer checks for when it’s time for an oil change.
You also get control over how much—or how little—car insurance coverage to purchase. While leasing companies often require collision and comprehensive coverage, car owners get to choose whether to purchase this additional coverage. You just need to satisfy the minimum state liability requirements to drive your own car legally. That’s not to say you shouldn’t consider full coverage car insurance, but you do get a little more flexibility as a car owner.
However, if you really want to drive a new vehicle every couple of years, buying a car won’t make as much financial sense. New cars depreciate as soon as they hit the road, and even normal wear and tear can bring the car’s value far below the purchase price.
Leasing vs. Buying a Car
Most people benefit the most from buying a car instead of leasing. The total cost of owning is less than leasing, and when your loan term comes to an end, so do your monthly payments. Plus, you end up with an asset that you can sell to put toward your next vehicle down the road.
But there are still some perks when it comes to leasing. Lower monthly costs and the chance to drive a new vehicle every few years appeal to some drivers who think about car use in the short term.
Ultimately, the right option for you comes down to your budget, driving habits, and lifestyle choices.
Who benefits the most from buying a car?
Buying a car is best if you:
- Want to save money on the total cost of driving a vehicle
- Put a lot of miles on your vehicle for commuting to work or leisure
- Plan to drive the same car for a good amount of time
The benefits of buying a car include lower total cost for using a vehicle, more affordable insurance options, and more flexibility to use it.
When you buy your own vehicle, you can forget about the number of miles you drive and choose the car insurance coverage that works best for your vehicle and budget: you’re in total control. Plus, once your car is paid off, you have an asset that’s all yours. You can keep driving that car for as long as you want and are able to.
Drivers who buy new cars take a big hit with the depreciation of the vehicle, but buying a used car instead can help you come out ahead on the resale value. With the right coordination, you can use your owned vehicle as a trade-in or sell it on your own when you’re ready to upgrade.
Who benefits the most from leasing a car?
Leasing a car is best if you:
- Want to avoid up-front costs like a down payment
- Don’t want to cover maintenance costs on your own
- Can stay under a mileage limit
- Prefer to drive a new vehicle every few years
Drivers who need lower monthly payments, want to always drive a new vehicle, or run a small business benefit the most from leasing a car.
While not the best bet for the most affordable total cost, car leases can have lower monthly payments than car financing for a new car in the short term.
Since lease terms range from 12 to 48 months, you’ll get the chance to drive a new vehicle more often than if you bought a car.
Make Sure Your New Car Is Protected
Whether you go for an auto lease or buy your next car, make sure it’s protected with the right car insurance coverage. Just like you want to find the best monthly rate on a lease or car loan, you should compare auto insurance premiums too.