Car Buying: Lease vs. Buy—Which is Better?

Deciding whether to lease or buy a car depends on your budget, lifestyle and driving habits. This article breaks down the pros and cons of each option and offers tips to help you make the best decision.

Article overview:

• How to buy a car: Learn the steps to financing, negotiating and finalizing a car purchase.
• How to lease a car: Understand the leasing process, from mileage limits to residual value.
• Pros and cons of buying vs. leasing: Compare the benefits and drawbacks of each option.
• Negotiation tips: Get strategies to save money and secure favorable terms, whether buying or leasing.
• Final decision-making tips: Discover how to evaluate your needs and budget to make the right choice.

Should I lease or buy a car?

When deciding whether to buy or lease a car, start by considering your goals. Do you enjoy paying off a loan and owning your vehicle outright, or are you comfortable with a cycle of continual car payments in exchange for driving a new car more frequently?

How to buy a car

When you buy a car, you make payments to a lender and can care for or modify the car in any way you wish. No matter how many miles you put on the car or what condition you keep it in, it’s yours provided you make your monthly payments on the loan, in addition to any interest.

The process of buying a car generally starts by getting pre-approved for car financing if you don’t intend to pay cash. While many dealers offer financing, getting pre-approved puts a little more borrowing power in your hands and affords you the potential for a lower interest rate.

Once at the dealer, you begin the test drive phase, any trade-in assessments and price negotiations. Before signing a deal, compare loan offers and any financing agreements carefully to ensure they align with your budget. If satisfied with the terms, you then complete the necessary paperwork to finalize your purchase.  

Pros and cons of buying a car

Generally, the people best suited for buying a car via traditional loan or cash are those who value ownership, drive high miles and can afford the long-term expenses of maintenance and repair. There are other factors, however, that can make car buying a less-than-ideal scenario for many. Let’s look at some of the pros and cons of purchasing a car the traditional way:

Pros of buying a car

• Opportunity to own and build equity in the vehicle
• Potential for long-term savings (i.e., no car payment) once the loan is satisfied
• Flexibility to modify, sell or trade the vehicle at any time
• No limitations on mileage
• No special fees
• No penalties (short of one’s own repair bills) to vehicle damage or customizations

Cons of buying a car

• Potential for higher monthly payments
• Down payments (e.g., 20% of the purchase price) are typically required
• Optional but recommended Gap insurance costs
• Repair costs beyond warranty expiration date
• Depreciation that begins the moment you complete the purchase (A 2024 AAA analysis estimated that a new car would lose an average of $4,680 in value per year over the first five years, and 75,000 miles due to depreciation.)
• Potential for long-term debt with interest payments if financing

How to lease a car

Car leases are like renting; you’re paying to drive a vehicle for a specified amount of time without the benefit of ownership. And while you may have the option to purchase the vehicle once your lease is up, your monthly payments throughout the lease won’t directly go toward ownership. 

Once you decide on the type of vehicle you want, the car lease process should begin by researching different lease terms and mileage allowances. Be mindful of over-mileage charges associated with any lease agreement; if you anticipate that you’ll drive more miles than the allotted terms, consider other alternatives. At the time of lease termination, many people are caught off guard by the fees associated with exceeded mileage.

After you’ve found a lease with mileage terms you’re comfortable with, consider things like residual value (i.e., what the car will be worth at the end of the lease) and any trade-in value that can be applied toward your monthly payment.

Also, look for manufacturer lease deals or incentives that can help further lower the lease price. Once you agree to all terms and conditions, the dealer will handle the necessary paperwork to get you out the door and on the road in your new lease.  

Pros and cons of leasing a car

There can be real appeal in driving a newer-model car every couple of years, and for many, leasing provides a viable way to do this. Provided you can stay within mileage limits and take good care of a vehicle, leasing may make the most sense.

There are some specific terms and conditions that are part of most lease agreements; however, unless you know what those are in advance, you could face surprise charges and penalties at the time of termination. Let’s take a closer look at the pros and cons of leasing:

Pros of leasing a car

• Potential for lower monthly payments and low or no down payment
• Warranty-covered repairs
• New vehicle every couple of years
• No reselling hassles
•  Tax deduction opportunities if you lease your vehicle for business

Cons of leasing a car

• o   No opportunity to build equity
• o   Restrictions on mileage and use; no modifications
• o   Fees for damages beyond what the leasing company defines as normal wear and tear
• o   Early cancellation penalties; while there are ways to get out of a car lease, it can be difficult to avoid stiff early termination fees
  
  

Tips for negotiating

Whether you’re buying or leasing, knowing how to negotiate can help you save money and get terms that work in your favor. Here are a few strategies to keep in mind:

• For buying: Get pre-approved for a loan to strengthen your negotiating position and show sellers you’re a serious buyer.

• For leasing: Ask about manufacturer incentives or lease specials that can help lower your monthly payment or reduce upfront costs.

• For both: Research the vehicle’s fair market value, be willing to walk away if the deal doesn’t meet your needs and avoid discussing monthly payments until you’ve agreed on the total price.

Arriving at a final decision that makes cents

When contemplating the decision to buy or lease a new car, careful calculations around budget, a realistic view of your driving needs, and a full understanding of the loan or contract conditions will help you put yourself in a confident negotiating position and ultimately reach the right agreement.  

Be sure to exercise a few hypothetical scenarios to see how buying vs. leasing can stack up over the short and long term and remember that what works for one person may not work for another. Each situation is different and options for acquiring a new car are available for this reason.