The choice between buying and leasing has often been a tough call. On one hand, buying involves higher monthly costs, but you own something in the end. On the other, a lease has lower monthly payments, but you get into a cycle where you never stop paying for a vehicle. Now, more people are choosing a lease over a car loan than just a few years ago. And it looks like the boom in leasing isn't stopping anytime soon.

The Changing Landscape

A number of converging trends have changed the leasing landscape for the average consumer. For decades now, a large proportion of luxury cars have been leased. But that has changed, with more compact cars, mainstream sedans, and small SUVs entering the new-car lease market, as well. Attractive finance rates have made some leases pretty good deals.

Automakers benefit by leasing a big portion of a car's production. Leases help keep used-car supplies steady, which in turn boosts resale values. A high resale value means a vehicle is slower to depreciate, which translates into cheaper leases for that model. That benefits consumers.

More on Car Buying and Leasing

Furthermore, when customers return their car at lease-end, it gets those customers into the dealership in person. This is where the dealer has the chance to move them into a new car, which an off-lease customer needs pronto.

The low interest rates that have prevailed elsewhere for the past few years have carried over into lease contracts, which also helps moderate their cost. Interest rates are a critical part of the economics of leasing, because at the end of the day a lease is just another way to finance a car.

Another tactic for boosting a car's resale value is reflected in the low mileage allowance in some new leases: 10,000 miles per year instead of the customary 12,000 to 15,000 miles. That may be fine for people who don't drive much, but the average driver will exceed that figure each year.

We also see a growing number of leases with terms of less than 36 months, which is a mixed blessing. Sure, it looks good to someone who doesn't want to be locked into a long contract. But a car's first two years usually make up the steepest part of the depreciation curve, making for an expensive lease period.

However, it's becoming common in the car-loan market for people to stretch out the loan for seven or eight years, simply to keep the monthly payment under control. Some of those people may be better off leasing.

How Loans and Leases Differ

Below are some of the major differences between buying and leasing.  

Buying

Leasing

Ownership

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

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

Up-Front Costs

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

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

Monthly Payments

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.

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.

Early Termination

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.

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.

Vehicle Return

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

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

Future Value

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

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.

Mileage

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.

Most leases limit the number of miles you may drive, often 12,000 to 15,000 per year. (You can negotiate a higher mileage limit.) You’ll have to pay charges for exceeding your limits.

Excessive Wear and Tear

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

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

End of Term

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

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

Customizing

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

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.


Car Loan vs. Lease Comparison

This example compares the costs of financing a car with a six-year loan vs. two three-year leases, based on leasing an identical car twice. "Owning" after three years assumes paying off the loan or taking the buyout offer with the expiring lease. This hypothetical example is based on a $24,130 2017 Honda Accord LX CVT. The numbers are rounded.

6-Year Loan

3-Year Lease(s)

Monthly Payment

$357

$211

Down Payment

$2,000

-

Cash Due at Signing

-

$2,000

Interest Rate

2.9%

1.7% (Factor .00069)

Total Paid After 3 Years

$14,852

$9,596

Residual Value After 3 Years

-

$13,434

Total Paid After 6 Years

$27,704

$19,192 (two leases back to back)

Resale Value at Age 6

$6,500 to $9,000

You don’t have a car to sell/trade in