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Decide whether leasing or buying a car is the best option for you
Many motivated car buyers struggle with the decision to lease or buy a car. The case for leasing or buying can be viewed through several lenses, but, for most, the decision-making process usually centers on financial issues (monthly payments, credit scores, vehicle depreciation) and issues related to lifestyle (average number of miles driven per year, desire to drive latest model vehicle). Below, we compare leasing vs buying a car.
What is a car lease?
While leases are difficult to generalize, they typically require an initial down payment, followed by a set monthly payment over a fixed amount of time, usually 24 to 48 months.1 Leases allow shoppers to drive a new vehicle without buying, and can provide low monthly payments. A lease payment often amounts to less than half the monthly payment for the same vehicle if purchased with a traditional auto loan.
Many people associate leases with the flexibility of renting a home as opposed to buying one. You’re not obligated to commit to a lease longer than three years. And, if you want a new car at the end of your contracted period, you can lease a newer model. Just keep in mind that leases often come with mileage restrictions and penalties for wear and tear.
Compare the advantages of leasing vs. buying
Consider the advantages of leasing or buying a car.
Advantages of leasing a car
Although you may incur maintenance costs, such as oil changes, most maintenance fees are covered under warranty for leased cars.
Lease payments often cost less than monthly car payments.
Advantages of buying a car
You may have more negotiating power. Car dealerships usually receive a larger commission on a car sale than on a lease.
You have the freedom to sell, donate or gift your car at any time. Of course, if the sale price is lower than your loan pay-off amount, you’re still responsible for the difference.
You can customize your vehicle as you wish, like with a new paint job or upgraded stereo.
You don't have to worry about paying wear and tear fees or mileage penalties that come with a leased vehicle.
How to determine leasing or buying makes financial sense
One helpful way to understand whether or not leasing or buying a vehicle makes financial senses is to create a lease vs. buy balance sheet. Let’s consider a common, real-life scenario and look at how buying and leasing compare to one another over given periods of time. We’ll account for variables like average new car cost, vehicle depreciation and maintenance costs. For our example comparison, we’re using the Toyota Camry SE, the most commonly sold car in the United States.2
Here are a few things we kept in mind when constructing our scenario:
The average car ownership length in the United States is about 72 months.3
Most leases are either 24 or 36 months. To make the comparison relatively straightforward, we’ll assume that our imaginary lessee will go through two 36-month leases in this 72-month period.
Our imaginary buyer will be purchasing the same vehicle on a 60-month car loan and have one year of no payments.
Average drive-off fee/down payment5
Total out-of-pocket costs after six years5
Vehicle value after six years5
After accounting for a down payment, monthly payments and depreciation, the net cost of ownership is $5,059 less than the cost of leasing. Of course, that’s assuming that the buyer is able to sell the vehicle for the depreciated value at the end of our example 72-month period.5
While the buyer has paid the full purchase price of about $25,000, this is offset by the fact that the buyer now has more than $9,600 in equity by owning the vehicle.
Because the payment period is over after 60 months, if the buyer decides to keep the vehicle for longer than six years, the economics of buying vs. leasing begin to tip more heavily in favor of buying. This is especially true if the car doesn’t experience any major mechanical issues.
If the buyer’s car has remained in good condition, it can be sold for the depreciated value of about $9,600. That money could be used towards the purchase of a new vehicle.
Can I terminate a lease?
Generally speaking, leases can be terminated early. But that comes at a cost. Most lease arrangements have clauses that include penalties for early termination. A lessor should disclose the consequences associated with early termination when filing the leasing paperwork. While an early termination will incur a fee, this fee should not be exorbitant in nature, as stipulated by the Consumer Leasing Act, which states that “early termination may be specified in the lease but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.”6
On the other hand, if you terminate the lease early, you’ll be able to avoid all of the mileage restrictions associated with leasing.
Additional questions when considering to lease or buy a car
Here are additional factors you should consider that might help decide which option makes more sense to you:
What's the length of loan or lease you’re considering?
How will your credit score affect the APR and monthly payment of a loan?
How much do you value a new vehicle?
What's your average driven miles per year?
How long do you intend to drive your next vehicle?
Auto loan pre-approval with Nationwide
Depending on your circumstances, both buying and leasing a car offer a path to driving a new vehicle that suits your needs. Usually, buying a new car requires auto financing. If you’re considering purchasing a new vehicle, consider getting a pre-approved loan with us. The pre-approval process is quick and easy.