Buying versus Leasing a Car: Which is Better?

You've decided that you need a new car, but you are not sure whether you should buy or lease. If you are in this situation, you are not alone. Many people in the market for a new vehicle are unaware of the important differences between these two options.

The truth is one option is not necessarily better than the other. In order to determine which option is right for you, you will need to weigh the pros and cons for each and then decide which one is better for you.

The Initial Transaction

Buying: When you buy a car, you are in effect financing the purchase of the vehicle in which you are paying for the entire cost of the car. In order to purchase a vehicle, you often will need to make a down payment, pay a sales tax on the transaction and secure a loan from a lending company, through which you will pay interest on top of the principle loan amount; the better your credit score, the better your interest rate will be. Your first payment will be due the first month following the sale and is generally higher than it would be in a leasing agreement.

Leasing: In contrast, leasing a car equates to financing the use of the vehicle in which you are paying only for a portion of the car's costs. When you lease a car, you most likely will not need to make a down payment and you will need to pay sales tax only on your monthly payments. You also will need to pay a financial rate, or money factor, which is similar to the interest you would pay on a loan. There also might be additional fees and a security deposit. In addition, you will make your first payment when you sign the contract, essentially covering the next month in advance. Despite the fees, security deposit and your first month's payment, the initial out-of-pocket costs for leasing a vehicle are much lower than they are when you buy a car.

Driving the Vehicle

Buying: When you buy a car, you do not have any limits on how you use the vehicle. You do not have any mileage restrictions, and you are able to sell or trade-in the car for its depreciated value when you are ready for your next vehicle. In addition, your auto insurance coverage limits are typically lower when you purchase a car versus leasing it. Another perk to buying a vehicle is you can look forward to the day when you own the car outright and are debt-free. And while owning a car outright is a benefit, this ownership comes with the need to cover any maintenance costs once the warranty has expired.

Leasing: While those who purchase a car have no limits on how much they drive the vehicle, those who lease a car do have mileage restrictions that are determined by the dealership. These restrictions are generally 15,000 miles per year, but can be as low as 12,000 miles depending on the agreement. If you exceed the mileage restriction, you will end up paying a fee based on the number of miles you go over the limit; this fee can range from 15 cents per mile up to 25 cents per mile. Additionally, when you lease a vehicle, the car remains the property of the dealership. Therefore, the insurance coverage you must carry can be higher than if you had purchased the vehicle.