Leasing vs Buying a Car – What Is Best for You as Per Your Income? Buying a car means you own the vehicle once payments have been made. A car lease agreement is an agreement to use a vehicle, new or used, for a specified number of months and miles.
For many, the ability to drive newer car models or have lower monthly payments can make leasing a car more attractive than buying one.
Choosing whether to buy a car or lease it can be an important financial decision. The most important factor to consider is that leasing is like renting and your payments will not go towards owning the car unless there is an option to buy it. Instead, you’ll need to return the car once the lease is up.
To help you choose the best option for you, here are some of the key factors when buying or leasing a car.
Fast answer: Leasing may be cheaper up front and ensure you always drive a newer vehicle, but if you want to avoid mileage and usage restrictions and build value in your car, purchasing may be the best option.
KEY TAKEAWAYS:
Renting a car basically means renting it for a specific and limited period of time.
Buying a car means you own it outright and build equity in the vehicle with monthly payments.
The benefits of leasing typically include a lower initial cost, lower monthly payments compared to buying, and no resale issues.
The benefits of buying are generally ownership of the car, complete control over the mileage and a firm idea of the costs.
Experts often say that buying a car is a better long-term financial decision.
Leasing vs Buying a Car: What’s the Difference?
When you rent a vehicle, you pay to drive it for a set period of time. The average lease is 24 or 36 months, although you can find even longer leases. Restrictions apply to the number of miles you can drive and any modifications you want to make. Various fees will apply.
Once the lease period ends, you have the option of returning the vehicle to the dealer or purchasing it for a predetermined amount, as defined in the car lease agreement.
When you buy a car, you immediately acquire ownership of it. You own it outright if you pay in cash or after paying off a loan if you finance your purchase. You maintain control over all aspects of the vehicle and can ultimately keep, trade in, sell or give it away.
Pros and Cons of Leasing a Car
Pros of Leasing a Car
At first glance, leasing may be more attractive than buying. Monthly payments are usually lower because you don’t pay any principal. Instead, you’re simply borrowing and paying the difference between the car’s value when new and the car’s residual value (its expected value when the lease ends) plus any finance charges. The main advantages of leasing include:
- You drive the car throughout its years without problems.
- Always drive a late model vehicle that is usually covered by the manufacturer’s new car warranty.
- The lease may even include free oil changes and other scheduled maintenance.
- You can drive a better-equipped, higher-priced vehicle than you could otherwise afford.
- Your vehicle will have the latest active safety features.
- You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.
- There could be significant tax advantages for business owners.
- In the end, you will simply deliver the car to the dealership.
Cons of Leasing a Car
As attractive as a lease agreement may seem, there are a number of disadvantages:
No ownership: Mileage restrictions in a lease can prevent how much and how far you want to drive. Additionally, drivers who wish to make modifications to their vehicles should understand that fees may apply. For example, there may be additional costs at the end of the lease due to the need to reverse any changes they make.
Lack of control: You can’t sell the car or trade it in to reduce the cost of your next vehicle. Additionally, since you will begin a new lease when it expires, you will always have monthly payments and a continued lack of control over certain aspects of a vehicle.
Fees and other costs: Your lease fees apply to excess mileage, modifications to the car, and excess wear and tear. There is also an early termination fee if you decide to end the lease early and an acquisition fee (also called a lease initiation fee).
Once the contract is up, you may have to pay a fee to cover what the dealer pays to clean and sell the car. Finally, unless your lease includes gap insurance, you may also owe costs related to accidents you’ve had that your insurance doesn’t cover.
Moreover, to lease a car you should need an income requirements to get the best deals. Check out the income requirements to lease a car.
Ultimately, it’s more expensive to lease cars long-term than it is to buy them and use them for years. There are also some things and mistakes to avoid when leasing a car.
Pros and Cons of Buying a Car
When you buy a car, you can keep it for as long as you want. You’ll typically make a larger down payment and slightly higher monthly loan payments compared to lease payments on the same car. These are the pros and cons of buying a car:
Pros of Buying a Car
No restrictions: Unlike leasing, you are not required to pay fees related to the mileage and wear and tear of the car. Since you are the owner, you pay for service and repairs on your own schedule.
Full Control: You also have full control over how to upgrade your car or, for example, modify its appearance. If you financed your purchase, once the loan is paid off, you can keep it until you die, trade it in, sell it outright, or give it to a family member. Up to you.
Potential for tax deductions: If you use your car for business and personal reasons, the IRS allows you to deduct the costs and depreciation related to that business use. You must keep careful records to support your presentation, so make sure you fully understand what is involved.
Long-term cost: It is generally cheaper to buy a car and keep it as long as possible.
Cons of Buying a Car
Rapid depreciation: New cars can lose between 15% and 25% of their value in the first five years of ownership.8 If you view your car as an investment, then this is a disadvantage. However, if you’re the type to buy and keep a car for years, then it shouldn’t matter.
Driving costs: According to a 2022 study by AAA, the cost of driving a new car for about 15,000 miles totaled $10,728. Costs included fuel, insurance and maintenance.
Leasing vs. Buying a Car: Summary
| Leasing | Buying |
|---|---|
| Pay to drive a car for a specific time frame; no ownership | Own and drive for as long as desired |
| Lower or no down payment and monthly payments | Usually higher down payment and slightly higher monthly payments |
| Get into a luxury car at less cost | Higher cost for more expensive cars |
| Get automotive advances with every new lease/new car | Restricted to car’s technology until new purchase or upgrades you initiate |
| Turn in (or buy) car when lease is done | Must arrange trade-in or find buyer if you wish to sell |
| Restrictions on miles allowed and modifications to car | No mileage restrictions |
| Various fees can bump up cost at end of lease | No special fees |
| All costs aren’t known until lease ends | Costs are known/can be projected |
| Higher cost over long period of time and multiple leases | Lower cost when bought and kept |
Read More: Process of Buying Out a Leased Car
Things to Consider Before Making any Decision
How much do you want to spend in monthly payments?
Leasing can be less expensive than short-term new vehicle loans because the monthly payments are lower. This is because lessees pay for the car’s depreciation only during the lease term, rather than paying down the principal as is done with a car loan.
How long are you willing to do them?
If you rent continuously, you will always have monthly payments. Conversely, if you buy a car, you may have to make higher monthly payments for a few years and then the payments end when the loan is paid off. That means you can continue driving the car without payments and the vehicle will be yours.
How much are you willing to pay in startup costs?
A commonly cited advantage of leasing is that it maximizes cash flow. Another way to look at it is a “pay as you go” form of car ownership. So, instead of investing a lump sum into a large down payment and making high monthly payments, you can lease.
Where are you driving?
The standard lease allows 12,000 miles per year or 36,000 miles for a typical three-year lease.
If you drive more than the permitted miles, you will have to pay for each additional mile (usually 10 to 25 cents per mile) at the end of the lease. This can be costly.
How clean do you keep your car?
Most leases are for three years, giving drivers plenty of time to spill soda on seats, bump bumpers, and scratch door panels. But while leases allow for average wear and tear, you’ll need to return the car in the condition it was in when you received it.
Additionally, if you’re someone who likes to customize your car with features like custom wheels, running boards, or spoilers, for example, leasing probably isn’t the best option for you.
Do you use your car for business?
If you use a leased car for business purposes, you may be able to write off your lease payments or mileage rate for your business as a tax deduction.
Don’t Forget to Negotiate the terms of your lease
You can get a better deal by comparing several lease offers and negotiating their terms. Lease terms are negotiable and the most common items consumers negotiate include:
- The cost of the vehicle.
- The estimated value of the car at the end of the lease, also called residual value. This is what you will pay for the car if a purchase option is included.
- Down payment amount
- Trade-in value of your current vehicle
- Rental charge or money factor
- Mileage limit
- Purchase option
Learn more about how to negotiate a car lease.
Is It Cheaper to Buy or Lease a Car?
In the short term, it is generally cheaper to lease a car due to less stringent down payment requirements, lower monthly payments, and minimal maintenance and repair costs.
However, in the long run, you may be able to save more by purchasing a car because you’ll keep all of the equity you’ve built up as you pay off the loan. If you keep the car after paying off the debt, you will no longer have to worry about a monthly payment.
Tax Benefits of Leasing a Car vs. Buying a Car
Both options come with their own set of tax benefits, and the choice between leasing and buying should be made with careful consideration of individual circumstances and financial objectives.
Tax benefits of leasing a car:
Deductible Lease Payments: In many cases, the IRS allows people who use a leased vehicle for business purposes to deduct the business portion of their lease payments. This can be advantageous for business owners or self-employed people who need a vehicle for work-related activities.
Depreciation deductions: Since the leased vehicle is not the property of the lessee, the lessee is not responsible for depreciation over time. Instead, the leasing company assumes this responsibility. For tax purposes, this can be beneficial as the lessee does not have to worry about calculating or claiming depreciation deductions.
Sales Tax Deductions: In some states, renters may be eligible to deduct a portion of the sales tax associated with their lease payments. This can provide additional savings, especially for those who live in states where sales taxes are imposed on lease payments.
Tax benefits of buying a car:
Depreciation Deductions: When you buy a car, you can usually claim depreciation deductions on the value of the vehicle over time. This can be advantageous for business owners or people who use their cars for work purposes. However, it is important to note that depreciation deductions for personal use are limited.
Interest Deductions: If you finance your car purchase with a loan, you may be eligible for interest deductions on the loan payments. This can be especially beneficial for those who itemize deductions on their tax returns.
Possible Section 179 Deductions: Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualified equipment, including certain vehicles, in the year it is purchased. This can provide a significant upfront tax benefit for businesses investing in a new vehicle.
Is It Better to Takeover Anyone’s Lease?
Lease buyouts often involve shorter terms than starting a new lease. If you’re looking for a temporary solution or want to test drive a particular car model without a long-term commitment, a lease can be advantageous.
In many cases, lease buyouts come with lower upfront costs compared to starting a new lease. This can be beneficial if you are looking for a more cost-effective way to access a vehicle.
Taking over someone else’s lease may be a reasonable option if the terms fit your needs and the condition of the vehicle is satisfactory. However, there are also some pros and cons of car lease takeover that you can consider.
Do I Need to Maintain a Good Credit Score to Lease a Car?
Yes, maintaining a good credit score is often crucial when it comes to leasing a car. Your credit score is an important factor that leasing companies consider when evaluating your eligibility for a lease.
A higher credit score often translates to more favorable lease terms, including lower interest rates and potentially lower monthly payments. We recommend that before leasing a car you should improve your credit score.
For more information you can check out what’s the minimum credit score needed to lease a car.
Bottom line
Whether you choose to lease or buy a car, it’s important to remember a few key factors.
Your credit score is the primary measure of your ability to make your monthly payments. Aim for a score between 680 and 740 for leasing, and 660 or higher if you decide to buy. If you have poor credit then consider places to lease a car with bad credit.
Also consider the time of month, year, or even week you decide to go to the dealership. Holidays or colder months may mean you’ll get a better deal.
People Also Ask
Is it better to rent a car than buy one?
In the long term, leasing continuously is more expensive than buying a car. Additionally, purchasing a vehicle allows you to build equity in an asset. At the same time, there are situations where leasing still makes sense; after all, it’s usually cheaper for your monthly budget.
Is it smart to buy a car that you have leased?
Purchasing your vehicle after the lease can save you additional fees and penalties for exceeding your mileage. But make sure those fees exceed the price you’ll pay to purchase the vehicle.
Which option is more profitable, renting or buying?
Profitability depends on individual preferences and financial situation. Leasing typically has lower monthly payments and upfront costs, making it more affordable in the short term. Buying may be more profitable in the long run due to ownership and potential resale value.
Are there tax advantages when buying a car?
Yes, buying a car can offer tax advantages, including depreciation deductions, loan interest deductions, and possible Section 179 deductions for businesses.