Car shopping: Buying versus leasing your next vehicle

December 08, 2020

As you weigh your options, here are key considerations to help guide decision-making.


Should you buy or should you lease? Here’s key things to know as you consider the best option.


Buying a car

For most people, buying a vehicle is the second-most expensive item you’ll purchase, aside from a home. So before you head to the showroom, here are some pros and cons.

Buying avoids mileage limits.

The average American driver clocks roughly 13,500 annually, according to the U.S. Department of Transportation. Most lease contracts let you accrue 12,000 miles each year (36,000 over the term of a 3-year lease). And if you go over your lease contract, you'll often have to pay an additional fee per mile.

Owning means you won’t be held to annual mileage restrictions. Drivers with long commutes to work or who enjoy taking road trips, won’t have to worry about penalties.

Buying may require higher payments.

If the cost of a car down payment seems a bit daunting, perhaps you may consider buying a less expensive car that’s still safe and reliable, says Rebecca Smith, officer and product manager for direct lending auto at U.S. Bank.

As a general rule of thumb, aim for 20 percent down, especially for new cars, and then 10 percent down payment for an older vehicle.

Some buyers may look at the necessity of a vehicle down payment as a negative to purchasing a new car. While coming up with a lump sum of cash to secure your new car may not seem enticing, buyers who are able to do so will end up with lower monthly payments. 

Buying allows for customization.

If you own a vehicle, you can modify it as much as you’d like. As long as you have the budget for it, go all out with however you want to customize your car. Drivers who lease do not have that luxury. Leased vehicles need to be returned in their original state, so any modifications would likely result in monetary penalizations.


Leasing a car

Leasing is an affordable way to get into the latest model year of a brand new car every few years. And it’s trending.

According to the Edmunds 2019 Automotive Industry Trends: Midyear Update, leases hit an all-time high of 32.2 percent in June 2019. In other words, leases accounted for more than 30 percent of new vehicles on the road in 2019.

Leasing works like a rental.

When you lease, the lender owns the car and is renting it to you. You make monthly payments, drive it for a set amount of time, then return it back to the dealer when the contract is up. In many cases, you have the option to buy the car at the end of the term. Or you can sign another lease with a different car.

Leasing comes with limited mileage.

Most car leases have mileage caps, often around 12,000 annual miles. If you go over the mileage cap, you'll often have to pay an additional fee per mile, which usually ranges between $0.10 to $0.25. If you don’t drive a lot anyway, you likely won’t have to worry. 

Leasing only allows for normal wear and tear.

Your lease agreement will note who must pay for maintenance and repairs during the term. Usually, the vehicle you’re leasing will still be covered by the manufacturer’s warranty. And it’ll cover the entire length of the lease and the number of miles you’ll likely drive.

Most lease agreements require you to pay for excess wear and tear. This means that when you return the vehicle end of term, the lender could charge you to fix anything deemed excessive by the lease agreement. “You’re on the hook for any wear and tear the lender deems outside normal levels,” Smith says. “Keep that potential in mind, especially if you have kids or pets.”

Leasing may mean lower monthly payments.

A lease can let you drive a new car with little or no down payment whatsoever. And lease payments are usually lower each month than loan payments for the same make and model. That’s because you’re paying for depreciation, not the full purchase price of the car.

If you’re self-employed or you own a business, you can potentially write off your lease as a business expense. It’s worth a call to your accountant to see how leasing may offset some of your costs.

However, you’ll want to ask about specific fees if you decide to pursue a lease:

  • Lease acquisition fee: This fee covers the leasing company’s administrative costs.
  • Security deposit: A security deposit often equals one month’s lease payment. 
  • Lease early termination fee: If you end your lease contract early, this fee could come into play. 
  • Lease disposition fee: A disposition fee covers the leasing company’s costs for cleaning and selling the car at the end of the lease. 
  • Higher insurance limits: Many leases require full-coverage auto insurance. And the cost of that full-coverage insurance (which gets calculated partly based on the car’s value) rises every year. 
  • Damage fees: When you turn in your vehicle, the lender will inspect it. During this time, a representative will look over the car for wear and tear, and you may be charged if it’s in excess of reasonable use.


Need help financing your next vehicle purchase? Explore a car loan that works for you.

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