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Leasing vs Buying

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 objectively and quantitatively.

Financial advantages to leasing

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 on high-end automobiles. 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 at the end of your contracted period, you want a new car, you can trade your currently leased vehicle in for another, usually newer, model.

Similar to renting an apartment, leasing a vehicle usually means that the lessor (those who grant leases) is responsible for the vehicle’s integrity, meaning that if there’s a mechanical breakdown, the lessor is responsible for repairing it, as long as the lessee has kept up with basic maintenance like changing the oil, etc. This is an important decision factor for many lessees (those who lease vehicles). In fact, studies have shown that a significant motivation for leasing lies in vehicle reliability. Consumers reason that, because they typically lease a new car, and due to the lessor’s responsibility for the mechanical integrity of the vehicle, leasing provides a great way to drive a well-maintained vehicle without fear of high maintenance costs.2

Financial disadvantages to leasing

On the other hand, some observers discourage leases based on a different interpretation of how leases operate. For one, many leases feature complex terminology, stipulations, and jargon that can confuse buyers during the leasing process. Phrases like “amortized amounts,” “capitalized cost,” and “capitalized net cost” can make the leasing process more complex than it needs to be.3 These ambiguous phrases lead some to associate leases with fraud, as demonstrated by journalists’ exposés in the 1990s that uncovered several fraudulent leasing operations.4 Consumers have legal protection under the Consumer Leasing Act of 1976, but the law has not eliminated the possibility of lease scams.5

Also, leasing a vehicle rarely leads to ownership, meaning that people who continually lease never acquire and can’t resell their vehicle after a period of time. Of course, lessees usually have the opportunity to purchase their leased vehicle at the end of the lease term, but at that point the leased vehicle has depreciated in value, and the lessee may simply be tempted to sign another lease for a new model vehicle.  As such, people can get caught in a cycle of leasing, moving from lease to lease without ever actually owning a vehicle that could contribute to their overall net worth.

Benefits and drawbacks to buying a car

Buying a car allows shoppers to own their vehicle outright, either by paying the purchase price up front, or, more often than not, by financing through a lender and paying back the loan incrementally. Buying a new car through financing means you will have something that you can keep as long as you like once the car is paid off, and that you can sell the car afterwards to a private buyer or a dealership. Depending on the APR, your credit worthiness, and length of loan term, however, you may end up with a much higher monthly payment than a lessee, and you could lose money when you factor in interest accrued over the life of the loan.

One helpful way to understand whether or not leasing or buying a vehicle makes financial sense is to consider a common, real-life scenario and create a lease vs. buy balance sheet. To accomplish this, we’ll look at how buying and leasing compare to one another over given periods of time, accounting 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.6

Here are a few things we kept in mind when constructing our scenario:

Lease Buy
Down payment
$2,000 $2,000
Monthly payment
Total payment amount        
$13,608 $26,554
Maintenance costs / year  
Average value after depreciation8
0 $(15,544)
Total cost of ownership (minus residual vehicle value)
$15,608 $13,810

As you can see, after accounting for a down payment, monthly payments, and depreciation for the make/model of the vehicle, and if we assume that the buyer is able to sell the vehicle for the depreciated value at the end of our example 72-month period, the net cost of ownership is $1798 less than the cost of leasing. While the buyer has paid the full purchase price of about $25,000, this is offset by the fact that the buyer now possesses over $15,500 in equity by owning the vehicle.

One consideration that is difficult to quantify is the value of driving two new cars in a 6-year period vs. driving only one - an advantage for the lessee. These shoppers may only use their car infrequently, enjoy having a new car every other year, or feel they require a newer car to enhance their prestige in a high-profile career.

Can I terminate a lease?

Generally speaking, leases can be terminated early - but at a cost. Most lease arrangements have clauses that include penalties for early termination, so be prepared for them. 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.”9

On the other hand, the buyer is able to avoid all of the mileage restrictions associated with leasing and drive his vehicle as far as he pleases in a given year. And because his payment period is over after 48 months, if our buyer decides to keep his vehicle for longer than six years, the economics of buying vs. leasing begin to tip more heavily in favor of buying - especially if the car doesn’t experience any major mechanical issues.

If the car has remained in good condition, the buyer can now sell his vehicle for the depreciated value of about $15,500, possibly putting that money towards a new vehicle purchase. Other shoppers may intend on purchasing a highly efficient, long-lasting vehicle and driving it for as long as possible. These owners probably count on their ability to pay off their car in a few years and drive it for several years thereafter, living without a car payment and saving money in the long run.

Questions when considering to lease or buy a car:

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 Nationwide. The pre-approval process is quick and easy, setting you up for a loan for your next vehicle.

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