Leasing vs. Buying a New Car

On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back the full principal. Instead, you’re just borrowing and repaying the difference between the car’s value when new and the car’s residual—its expected value when the lease ends—plus finance charges. The major advantages of leasing include:

• You drive the car during its most trouble-free years.
• You’re always driving a late-model vehicle that’s usually covered by the manufacturer’s new-car warranty.
• The lease may even include free oil changes and other scheduled maintenance.
• You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
• Your vehicle will have the latest active safety features.
• You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.
• There could be significant tax advantages for business owners.
• At the end, you just drop off the car at the dealer.

As attractive as a lease may appear, there are a number of disadvantages:

•  In the end, leasing usually costs you more than an equivalent loan because you’re paying for the car during the time when it is most rapidly depreciating.
• If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.
• Lease contracts specify a limited number of miles. If you go over that limit, you’ll have to pay an excess mileage penalty. That can range from 10 cents to as much as 50 cents for every additional mile. So be sure to calculate how much you plan to drive. You don’t get credit for unused miles.
• If you don’t maintain the vehicle in good condition, you’ll have to pay excess wear-and-tear charges when you turn it in. So if your kids are apt to go wild with markers or you’re a magnet for parking lot dents and dings, be prepared to pay extra.
•  If you decide that you don’t like the car or if you can’t afford the payments, it might cost you. You will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they’ll all be due at once. Those charges could equal the amount of the lease for its entire term.
• With a few exceptions, such as professional window tinting, you need to bring the car back in “as it left the showroom” condition, minus usual wear and tear, and configured like it was when you leased it.
• You’re still on the hook for expendable items such as tires, which can be more expensive to replace on a better-equipped vehicle with premium wheels.
• You may have to pay a fee when you turn in the vehicle at the end of the lease.

Some car buyers opt for longer-term car loans of six to eight years to get a lower monthly payment. But long loans can be risky, and these buyers might find leasing to be a better option.

Longer loans make it easy to get “upside down”—when you owe more than the vehicle is worth—and stay that way for a long time. If you need to get rid of the car early on or if it’s destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.

Buying a car with a loan isn’t the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading the vehicle in early will leave you paying so much in finance charges compared with principal that you’d be better off leasing. If you can’t pay off the difference on an upside-down loan, you can often roll the amount you still owe into a new loan. But then you end up financing both the new car and the remainder of what you owe on the old car—which already includes finance costs.

If your goal is to have low monthly payments and drive a new vehicle every few years with little hassle, then leasing may be worth the additional cost. Be sure that you can live with all the limitations on mileage, wear and tear, and the like.

It’s difficult to make a fair head-to-head comparison between, say, a six-year loan and the standard three-year lease. At the point the lease ends, the bank borrower still has three years of payments to go, but the lessee has to look for another car—or perhaps take the lease’s buyout offer.

A lease can also be subsidized, or “subvented.” The automaker either takes money off the top with an extra rebate just for lease deals, or it can raise the residual, or both.

An automaker may also kick in extra rebates on a lease deal—rebates not available to a loan customer. In addition, the “money factor” (interest rate) on a lease may be different from the interest rate offered on a loan, making an apples-to-apples comparison almost impossible.

In general, two back-to-back three-year leases will cost thousands more than buying a car (with a loan or with cash) and owning it over that same six-year period. And the savings increase for car buyers if they continue to hold on to the car, say, for three more years (for nine years total), even factoring in expected maintenance and repairs.

If a lease’s limitations put you off, consider buying a less expensive new car or a well-maintained used car, such as a certified pre-owned vehicle from a franchised dealer, or getting a longer loan term. Whether you get your new car with cash, a loan, or a lease, you can save by choosing one that holds its value well, stays reliable, and gets good fuel economy.

For savings up front and over the long haul, buy used. And pay cash.

If you’re considering an electric car, the math changes a bit. That’s because you might qualify for a $7,500 tax credit only if you lease rather than buy. In addition, leasing may offer some stability in an EV market that is changing rapidly and unpredictably.

Leases can qualify for a full $7,500 federal tax credit without meeting any of the restrictive federal requirements that purchasers must comply with on where an electric car was made, how much it costs, or a buyer’s income level.

In addition to tax savings, there are other benefits. If an automaker drops the price of a new EV by thousands of dollars overnight—as Ford did earlier this year on the F-150 Lightning—you won’t take the hit if your leased vehicle is suddenly worth less than it was the day before. And because you lease for only a few years, you won’t be stuck with a car that has outdated battery technology or charging standards, as these are still rapidly evolving.

Learn more in CR’s guide to EVs and leasing.

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

Many people assume that the monthly payment printed in a leasing ad is etched in stone. But that figure may be based on the manufacturer’s suggested retail price, which can be negotiated downward just as if you were buying the vehicle.

Be aware, though, that the best lease deals are available only to those with superb credit, and that they may only be cheap because the automaker is trying to clear the decks of slow-selling cars.

In addition to research and reviews, Consumer Reports offers members access to the Build & Buy Car Buying Service at no additional cost. Through this service, members can compare in-stock vehicles, see what others paid for the car they want, and customize their payments online. Once they find the vehicle they’re interested in, members can get up-front price offers online from local certified dealers. On top of national incentives, Consumer Reports members are eligible for additional incentive offers from select manufacturers through the Build & Buy Car Buying Service. Plus, members can get an instant trade-in value for their current vehicle to use toward their next car purchase.