Buying vs. Leasing

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Our experts answer your questions, leasing explained, and CR’s latest reliability survey

Is a Lease Right for You?

Leasing can get you a better car and a lower monthly payment, but it could also cost you more in the long run. Our experts help you decide whether you should lease or buy.

BUYING A VEHICLE with a conventional car loan is pretty straightforward: You borrow money from a bank, credit union, or other lending institution and make monthly payments for some number of years. A chunk of each payment is interest, and the rest is principal. The higher the interest rate, the higher the payment. As you repay the principal, you build equity until—by the end of the loan—the car is all yours.

As car prices rise and buyers start to demand the latest safety features that are available only on newer cars, leasing a vehicle has become a mainstream alternative to buying. In a lease, buyers make a monthly payment to drive a new car for a set term. That payment is often less than the monthly cost of nancing a new vehicle, but buyers must return the car at the end of the lease term.

To nd out whether leasing is right for you, we take a look at the pros and cons.

The Upside of Leasing

On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back any principal. Instead, you’re just borrowing and repaying the di erence between the car’s value when new and the car’s residual — its expected value when the lease ends —plus nance charges. Here are the major advantages of leasing: You drive the car during its most trouble-free years. You’re always driving a late-model vehicle that’s covered by the manu- facturer’s warranty, which may include free oil changes and other scheduled maintenance. A predictable monthly payment with no surprise repair costs can make it easier to stick to a household budget. You can drive a higher-priced, betterequipped vehicle than you might otherwise be able to a ord. This may allow you to opt for life-saving safety features that aren’t available on lower trims or used cars. You don’t have to worry about uctuations 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 signi cant tax advantages for business owners. At the end of the lease, you just drop o the car at the dealer.

The Downside of Leasing

As attractive as a lease may appear, there are a number of disadvantages: In the end, leasing usually costs you more than an equivalent loan, if only because you are always driv- ing a rapidly depreciating asset. If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after a loan is paid o , the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and

COMPARE Lease vs. Loan

This example, based on an advertised deal for a 2018 Honda CR-V with a $29,445 MSRP, compares financing a car with a six-year loan vs. two back-to-back three-year leases with identical costs. Outof-warranty repairs, maintenance, insurance, and incentives aren’t included; 6.35% CT sales tax and dealer fees are. 6-Year Loan 3-Year Lease(s)

Monthly payment $419 $346

Down payment/Cash due $2,000 $2,000

Interest rate 3.49% 2.208% (Money factor 0.00092)

Amount paid after 3 years $16,665 $14,266

Amount paid after 6 years $31,749 $27,937 ($595 acquisition fee waived for second lease)

Trade-in value at age 6 $9,165 N/A

TOTAL MONEY SPENT $22,584 (after trade-in) $27,937

keep it until it’s uneconomical to repair. Lease contracts specify a limited number of miles. If you go over that limit, you’ll have to pay an excess mileage penalty. That can range from 10 cents to as much as 50 cents for every additional mile, so be sure to calculate how much you plan to drive. Unfortunately, you don’t get a credit for unused miles. If you don’t maintain the vehicle in good condition, you’ll have to pay excess wear-and-tear charges when you turn it in. So if your kids are apt to go wild with the magic markers or you are a magnet for parking lot dents and dings, be prepared to pay extra. If you decide that you don’t like the car or if you can’t a ord the payments, it might cost you. You will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they’ll all be due at once. Those charges could equal the amount of the lease for its entire term. With a few exceptions, such as professional window tinting, you need to bring back the car in “as it left the showroom” condition, minus usual wear and tear, and con gured like it was when you leased it. You’re still on the hook for expendable items such as tires, which can be more expensive to replace on a better-equipped vehicle with premium wheels.

An Alternative to Long Loans

Some car buyers opt for longer-term car loans of six to eight years in order to get a lower monthly payment. But long loans can be risky, and these buyers might nd leasing to be a better option.

Longer loans make it easy to get “upside down”—where you owe more than the vehicle is worth—and stay that way for a long time. If you need to get rid of the car early on, or if it’s destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.

Indeed, buying a car with a loan is not the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading in early will leave you having paid so much in nance charges compared with principal that you’d be better o leasing. If you can’t pay o the di erence on an upside-down loan, you can often roll the amount you still owe into the new loan. But then you end up nancing both the new car and the remainder of your old car.

If your goal is to have both low monthly payments and to drive a new vehicle every few years with little hassle, then leasing may be worth the additional cost. Be sure, however, that you can live with all of the limitations on mileage, wear and tear, and the like.

Difficult Comparison

It’s very di cult to make a fair headto-head comparison between, say, a six-year loan and the standard threeyear lease. At the point the lease ends, the bank borrower still has three years of payments to go, but the lessee has to look for another car—or perhaps take the lease’s buyout o er.

A lease can also be subsidized, or “subvented.” The automaker either takes money o the top with an extra rebate just for lease deals, or it can raise the residual, or both.

An automaker may also kick in extra rebates on a lease deal—ones not available to a loan customer. In addition, the “money factor” (interest rate) on a lease may be di erent from the interest rate o ered on a loan, making an apples-toapples comparison almost impossible.

If a lease’s limitations put you o , consider buying a less expensive new car or a well-maintained used car, such as a “certi ed pre-owned” vehicle from a franchised dealer, or getting a longer loan term. Last, whether you get your new car with cash, a loan, or a lease, you can save by choosing one that holds its value well, stays reliable, and gets good fuel economy.

Don’t Forget to Negotiate

Many people assume that the monthly payment printed in a leasing ad is etched in stone. But that gure may be based on the manufacturer’s suggested retail price, which can be negotiated downward just as if you were buying the vehicle.

Be aware, though, that the best lease deals are available only to those with superb credit, and may only be cheap because the automaker is trying to clear the decks of slow-selling cars.

How Loans and Leases Differ

Below are some of the major differences between buying and leasing. To calculate the financial difference between a loan and a lease deal, use the calculators in the Cars area of CR.org.

BUYING

You own the vehicle and get to keep it as long as you want it.

They include the cash price or a down payment, taxes, registration, and other fees.

Loan payments are usually higher than lease payments because you’re paying off the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.

You can sell or trade in your vehicle at any time. If necessary, money from the sale can be used to pay off any loan balance.

You’ll have to deal with selling or trading in your car when you decide you want a different one.

The vehicle will depreciate, but its cash value is yours to use as you like.

You’re free to drive as many miles as you want. But keep in mind that higher mileage lowers the vehicle’ s trade-in or resale value.

You don’t have to worry about wear and tear, but it could lower the vehicle’s trade-in or resale value.

At the end of the loan term, you have no further payments and you have built equity to help pay for your next vehicle.

The vehicle is yours to modify or customize as you like, although doing so may void your warranty.

LEASING

Ownership You don’t own the vehicle. You must return it at the end of the lease, unless you decide to buy it.

Up-front costs

Monthly payments

Early termination

Vehicle return

Future value

Mileage

Excessive wear and tear

End of term

Customizing They can include the first month’ s payment, a refundable security deposit, an acquisition fee, a down payment, taxes, registration, and other fees.

Lease payments are almost always lower than loan payments because you’re paying only for the vehicle’ s depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees.

If you end the lease early, charges can be as costly as sticking with the contract. On occasion a dealer may buy the car from the leasing company as a trade-in, letting you off the hook.

You return the vehicle at lease-end, pay any end-of-lease costs, and walk away.

On the plus side, its future value doesn’t affect you financially. On the negative side, you don’t have any equity in the vehicle.

Most leases limit the number of miles you may drive, often 10,000 to 12,000 per year. (You can negotiate a higher mileage limit.) You’ll have to pay charges for exceeding your limits.

Most leases hold you responsible. You’ll have to pay extra charges for exceeding what is considered normal wear and tear.

At the end of the lease (usually two to three years), you can finance the purchase of the car, or lease or buy another car.

Because you must return the vehicle in salable condition, any modifications or custom parts you add have to be removed. If there is any residual damage, you’ll have to pay to have it fixed or you’ll need to file an insurance claim and pay a deductible.