Buying a vehicle is a fairly straightforward process. You borrow money from a lending institution, then make monthly payments until the loan is paid off. As you make payments, you gain equity in the vehicle until it’s eventually all yours. You can keep the vehicle as long as you like and you can do whatever you want to it, from installing aftermarket accessories to giving it a custom paint job. The only penalty for modification or abuse could be a lower resale value when you sell it or trade it in.
Because you’re typically paying back the entire cost of the vehicle (less any trade-in or down payment amounts), a loan’s monthly payments are higher than when leasing. And when you’re ready to get a new car, you need to either trade in or sell your old one.
On the surface, leasing can be more appealing than buying. Your monthly lease payments are typically much lower. Then, after enjoying the most trouble-free two or three years of the vehicle’s life, you bring it back to the dealership and either lease another new one or simply walk away. No muss, no fuss, right? With a lease, that new-car smell need never leave your nostrils.
There are other advantages to leasing:
- There’s often no down payment required when leasing, or only a low one.
- You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford to buy.
- You’re always driving a late-model vehicle that’s usually covered by the manufacturer’s warranty.
As attractive as a lease appears, however, there are a number of disadvantages:
- Leasing typically costs you more than an equivalent loan, in part because of higher finance charges.
- Once you’re in the leasing habit, monthly payments go on forever. In contrast, the longer you keep a vehicle after a loan is paid off, the more value you get out of it.
- You have a limited number of miles in your lease contract, typically 12,000 to 15,000 miles a year. If you drive more than that, you’ll have to pay an excess mileage penalty of 10 cents to as much as 25 cents for every additional mile. On the other hand, if you drive too little, you don’t get credit for the unused miles.
- You must maintain the vehicle in good condition, or you’ll have to pay excess wear-and-tear charges when you turn it in. So, if your kids are apt to turn the interior into a finger-painting studio or your car’s a magnet for parking lot dents and dings, be prepared to pay extra.
- If you need to get out of a lease before it expires, you may be stuck with thousands of dollars in early-termination fees and penalties—all due at once. This could equal the amount it would cost had you stuck with the lease for its entire term.
- You aren’t allowed to customize your vehicle in any permanent way.
In addition, arranging a lease can be a confusing, complicated process that can easily leave you paying more than you should.
It’s important to consider these pros and cons very carefully. If you’re unsure, you can use the “Documenting the deal” worksheet to crunch the numbers for a particular vehicle both ways to see how they compare. If you want low monthly payments but are concerned about the limitations of a lease, consider buying a less expensive vehicle or a well-maintained used car, or getting a longer loan term (although there are risks to this, as explained later).
Finally, whether you pay cash, take out a loan, or lease your next vehicle, you can save by choosing a vehicle that holds its value, one with good reliability and fuel efficiency and top scores in Consumer Reports’ vehicle Ratings.