Advantages & Disadvantages of Leasing or Financing a Car

If you’re in the market for a new car, you’re probably thinking mostly about make, model, color and price. But once you’ve made your choice, the next big decision is whether you want to buy – with financing – or lease. Each has its advantages and disadvantages, and considering your financial situation and intended use of the vehicle can help you decide which option is best for you.

If you own your car, you don’t have to worry about annual limits on the mileage you can drive, nor do you have to fork over dollars as a fee for damage such as upholstery stains or paint scratches. You can also sell your car anytime without penalty. As you pay down your loan, you build equity in your car, which you can turn into a down payment on new wheels. Hang on to your car long enough, and you'll have no payment at all.

If you buy a car, you pay for the entire worth of the vehicle, unlike when you lease. That means you get less car per dollar of your monthly payment than you’d get if you lease. If you do decide to keep your car for awhile, you'll have to factor in repair costs once your warranty expires. When you’re ready to sell your car for a newer model, you'll also have to deal with the hassle of selling or trading it in. Plus, cars depreciate in value, making them a poor long-term investment.

Monthly lease payments are less than loan payments on comparable cars for the same length of time. You can arrange a lease without a down payment, and you pay less in sales tax because you’re not purchasing the car. Also, warranties often last the length of the lease and cover maintenance costs. That means you can own a pricier car without big maintenance bills.

When your lease is up, you don’t have to find an independent third party or local dealer to take your car. Just hand over the keys to the dealer who leased it to you. That process means it’s easier to drive a new car every few years.

You lose freedom with a car lease. Expect the dealer to ding you as much as 25 cents per mile if you go over the mileage limit, usually set at 12,000 to 15,000 miles a year. It’ll cost you to break your lease early if you need to get rid of your car. The dealer may also demand that you carry more car insurance.

If you roll from one lease to another, your car payments never end. Furthermore, if you decide to keep your car at the end of the lease, you’ll pay more than if you decided to purchase the car in the first place.

Buy a car and pay $500 a month on a loan for four years, and you’ll pay $24,000. A lease might knock your monthly payment down to $400, or $19,200 over four years. However, you might have to pay another $8,000 if you decide to keep your car. That cost goes up if you get a loan to cover that $8,000, because you’ll also owe interest.

If you drive less than 12,000 miles a year and write off your car as a business expense, leasing makes sense. Leasing also works if you don’t have a down payment or trade-in car. If you take good care of your cars and want a new vehicle every few years, leasing may be your best bet as well.

If you lease, read the fine print in your contract. You could run into trouble if you pay too much up front – more than $2,000 – and the car is wrecked or stolen in the first few months of the lease. The dealer won’t refund you that money, so it's best to stick with a smaller or no down payment to protect yourself from early loss. Make sure your lease has gap insurance to cover the difference between the car’s value and your lease obligation if the car is totaled or stolen.

To avoid extra mileage charges, also be realistic about how much you drive annually. Don’t lease a car beyond its warranty period, which averages three years, or you could shell out extra maintenance dollars.