When you’re in the market for a new car, you’ve got two choices: leasing and buying. It’s a debate that many people have strong feelings about. But when you’re deciding which choice is right for you, it’s important to consider your unique needs and financial circumstances.

Both leasing and buying have some pros and cons, and each is likely to be better for a different type of person. We’ll break down how both options work, the pros and cons of each, and some factors to consider when making your decision.

Understand leasing a car

A car lease is a long-term rental agreement between a lessor (the company that owns the car) and the lessee (the person paying to use the car). Think of a car lease like an apartment rental — you pay to use the car during the lease term. Once the term ends, you return the vehicle to its owner.

Car leases usually include some of the following stipulations:

• How much you’ll pay each month
• How long the lease will last (they often last several years)
• How much you’ll be expected to pay in fees
• The rental charge or “money factor” that you must pay, similar to interest
• What happens if you terminate the lease early
• How many miles per year you can drive
• What maintenance is required on the car
• What happens if you miss a payment

Additionally, a lease agreement will lay out what happens at the end of the lease. In many cases, you’ll simply return the vehicle to the owner. However, many lease agreements give you the option to purchase the vehicle at the end of the lease term.

Advantages of leasing a car

• Lease payments are often lower than the monthly payment would be if you financed a purchase of a comparable vehicle.
• Leased vehicles are generally less likely to have issues, are still covered by the manufacturer’s warranty, and may cover oil changes and other scheduled maintenance.
• Because they are newer, leased vehicles often have the latest bells and whistles, including safety features.
• Leases often require lower down payments than financing a car purchase, and you may not be required to put anything down.
• Because you return the vehicle to the owner at the end of the lease, you don’t have to worry about selling it when you’re done driving it.

Disadvantages of leasing a car

• Your monthly lease payment doesn’t give you ownership as it would if you purchased the vehicle with financing.
• If you continually go from lease to lease, you’ll always have a monthly payment.
• Lease agreements limit the number of miles per year you can drive, meaning they may not be appropriate for people who drive a lot.
• It can be difficult and expensive to terminate a car lease early if you can no longer afford it or decide it's no longer right for you.
• You’ll likely pay added fees for any damage above and beyond what the lessor deems to be normal wear and tear.
• When your lease ends, you don’t get back any of the money you invested into it as you would if you sold a car you had purchased.

Understanding buying a car

In its simplest form, buying a car is the process of paying the dollar amount on the price tag and getting a car in return. However, given the rising cost of cars — the average new car sold for $48,528¹ while the average used car sold for $27,256² in May of this year — most people have to finance rather than buy in cash.

Financing a car has some similarities to leasing. You’ll often pay a down payment at the beginning and then will pay a monthly payment to the lender, which includes both interest and principal. The good news is that once you’ve repaid the full amount, you’ll fully own the vehicle and won’t have a monthly payment anymore.

Advantages of buying a car

• Each monthly payment builds equity in the car, and once you’ve repaid the full borrowed amount, you won’t have any more monthly payments.
• Because you own the car, you don’t have to worry about fees or limits on mileage, wear and tear, or anything else that’s not a priority for you.
• When you decide you’re done with the vehicle, you can trade it in or resell it and recoup its entire current value (minus anything you may still owe on your loan).
• In the long run, buying a car and driving it for many years is more affordable than leasing a vehicle.
• When you buy a new car from a dealer, you can customize it exactly how you want it, which isn’t usually the case with leasing.

Disadvantages of buying a car

• Buying and financing a car generally requires a higher monthly payment than if you had leased a comparable vehicle.
• When you own a vehicle, even if you haven’t fully paid off the loan, you’re solely responsible for all maintenance costs.
• A car loan usually requires a down payment, and depending on the car price and your credit score, your lender may require a large amount down.
• If you decide you no longer want the vehicle, you’re on the hook for finding a buyer and negotiating a sale price.

Factors to consider when choosing to lease vs. buy

Deciding whether to buy or lease a vehicle is a big decision, and the right answer for someone else may not be the right answer for you. Here are some factors to consider when deciding whether to buy or lease a car:

Your budget

Monthly payments are usually lower on lease vehicles than if you had purchased the same vehicle. So if you want a nice vehicle for a low monthly price, leasing may be the right choice. However, buying is more cost-effective in the long run. If your budget allows you to consider the big picture, consider whether buying might actually be the best financial decision.

Your driving habits

Lease agreements impose strict limits on the number of miles you can drive per year, as well as the amount of wear and tear that is acceptable without an additional fee. If you drive a low number of miles per year and aren’t hard on your vehicle, leasing could be a viable option.

However, if you drive more miles — generally more than 12,000 or 15,000 per year — then you may be better off buying. Additionally, if you tend to be hard on your vehicles and they go through excessive wear and tear, the fees for a lease could add up quickly.

Your future plans

Consider what you anticipate your future car situation to be. If you’re comfortable driving a vehicle for many years to save money, buying is more cost-effective. On the other hand, if you anticipate wanting to upgrade to a new vehicle every few years, you may be better off with a lease.

In addition to considering what car you envision yourself driving in the future, consider your future budget. Know that if you go the leasing route, you’re committing yourself to having a monthly payment. On the other hand, buying a car and paying off the loan will eventually leave you with no monthly payment, allowing you to put that money toward other goals.

Your vehicle needs

Leasing can be a great option for anyone who wants to always be driving a newer car. After all, you can simply end your lease after two to four years and upgrade to the newest model without much hassle.

A downside of leasing, however, is the limited customization. You can’t customize your vehicle in the same way you can if you purchase it brand new from the dealer. If you have very specific needs in your vehicle, buying may be the better option.

The bottom line

When you’re in the market for a new vehicle, deciding whether to lease or buy can be challenging. While there’s not necessarily one better option, there are some situations when leasing may be better and some situations when buying is preferable.

Ultimately, the greatest factor in determining whether you should lease or buy a vehicle is your personal and financial situation. Your budget, driving habits, and future plans can all help you decide whether to lease or buy your next vehicle.

And remember — whatever decision you make today isn’t permanent. If you lease or buy and decide it’s not right for you, you can simply choose the other option the next time around.

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