The pros & cons of buying vs. leasing a new car (2024)

If you’re getting a new car, you’ll need to decide whether to buy it or lease it.

Lease deals offer the allure of a new car at a lower monthly cost than buying, while buying is more flexible and holds the potential for lower costs over the long term. Which one is a better deal for you depends on what you can afford, how long you plan to have the car, how much you drive, and a few other key factors.

How buying a new car works

Buying your new car is the more intuitive of the 2 options. You’ll pay the full sticker price of the new car you’re getting, either all at once if you’re paying in cash, or over a number of years if you’ve taken out a car loan.

If you take out a loan, its total cost will be the cost of the car (the principal) plus interest. Each month, you’ll make a loan payment that pays off the interest and a portion of the principal. If you want to sell the car while the loan is still active, you can use the proceeds to cover the remainder of the loan. Or you can hold on to the car until you’ve paid off the loan, at which point you’ll have a car without a monthly finance payment.

The benefits of buying a car

• It can often save money in the long term. That’s especially true if you keep the car past the end of the loan and continue driving it without a monthly payment.
• A car you buy has equity; you can sell or trade it in for money toward your next car, even if you have a loan that hasn’t been paid in full.
• There are no mileage limits or limits on certain uses, like driving for a ride-hailing service or off-roading.
• You can modify your car however you want, from bumper stickers to extensive customization.
• You can get your car repaired with the parts you want on the schedule of your choosing.

What is equity?

Equity is the value of an asset after liabilities are subtracted. For example, if you have a car worth $15,000 and you still owe $3,000 on the car loan you bought it with, you have $12,000 of equity in that car.

The drawbacks of buying a car

• It’s more expensive upfront since you must pay cash or take out a loan for the entire price of the car plus sales tax. High interest rates can compound those costs.
• Once the warranties end, you are responsible for all maintenance costs, no matter how expensive.
• Your car’s future value isn’t guaranteed and might drop faster or farther than you hoped.

RELATED:Should you buy a new or used car?

How leasing a new car works

With a lease, you only pay the difference between the “capitalized cost” (the price of the car) and the “residual value” (what the car is expected to be worth at the end of the lease.) All else equal, a higher residual is a better deal for you as a buyer because you pay less for the lease. Leases typically last 2 or 3 years; once they’re over, you return the car to the dealer.

Like with a car loan, lease payments include interest on the value of the leased car. Instead of an interest rate, lessors use a “money factor” that works in a similar way: The higher the money factor, the more you pay. Money factors can be converted to interest rates by multiplying them by 2,400. For example, a money factor of .00208 is equivalent to an APR of 4.99%

The benefits of leasing

• All else equal, leasing may cost significantly less than buying the same vehicle over the same 2- or 3-year period. That’s true for both the initial money down and the monthly lease cost.
• Lease periods are typically covered by the automaker’s warranty, and cars are least likely to have mechanical problems in their first few years, so you may pay little or nothing for maintenance. Many leases even include regular maintenance like oil changes for free.
• Leasing ensures you’ll drive a newer vehicle with more advanced safety technology. If you string leases together, you will always be driving a recent model.
• You have no long-term stake in the car and don’t have to worry if it’ll hold its value or become mechanically unreliable.
• Most leases allow you to buy the car at the end of the lease for a price (the residual) agreed to at the beginning of the lease, plus fees. It's possible this residual will be less than the car is worth at the end of the lease, allowing you to buy the car at a discount.

The drawbacks of leasing

• You don’t own the car. When your lease ends, you’re left with no car and no equity. You must either get a new lease (likely including another down payment) or buy a car without a trade-in.
• There are limits on mileage, with most leases allowing 10,000, 12,000, or 15,000 miles each year. Go over that and you’ll be charged for it, typically 10 to 30 cents per extra mile. There is no refund for driving fewer miles than allowed.
• If you fall into a pattern of leasing every 3 years, it can cost more than buying long-term, since you’ll always have a car payment.
• If you decide you don’t like the car, you can’t return the lease before it expires without steep “early return” financial penalties.
• You probably won’t be allowed to customize the car.
• You might have to pay for more car insurance than you otherwise would. For example, your leasing company will likely require you to carry a policy with at least $50,000 of property damage coverage, as well as collision and comprehensive coverages. They'll also typically require gap insurance, which protects the leasing company if the car is severely damaged or totaled during the lease.

Examples of how buying vs. leasing can stack up over the short term & the long term

The tradeoffs of buying and leasing can be abstract without a concrete example. So, compare the 2 scenarios below:

Buying, hypothetical 9-year scenario:You buy a new car that’s $40,000. You buy it on a loan with a $10,000 down payment and a 5% interest rate, and pay $560 a month for 60 months (5 years).

• After 3 years, you’ve paid about $30,000 and have a car that’s worth about $25,000. You still have about $13,000 of principal left on the loan, so you’ve got about $12,000 of equity.
• After 6 years, you’ve paid the loan off (a total cost of about $44,000), haven’t had a car payment for the last 12 months, and have a car that’s worth about $14,000.
• After 9 years, you’ve had 4 years of a payment-free car (total cost remains $44,000) that is now worth about $7,000.

Leasing, hypothetical 9-year scenario:You lease the same new car in the example above, with a $40,000 capitalized cost. The lease requires $5,000 at signing and costs $390 a month for 36 months (3 years). You plan to lease a new model of the same car every time the lease expires.

• After 3 years, you’ve paid about $19,000 and have no car or equity.
• After 6 years, you’ve paid about $38,000 and have no car or equity.
• After 9 years, you’ve paid about $57,000 and have no car or equity.

Notice that after 6 years, you’ve spent more money buying ($44,000) compared to leasing ($38,000) but also have an asset worth $14,000, whereas leasing saved $6,000 in payments during those 6 years.

Which of these 2 scenarios would you rather find yourself in? The answer may indicate which is the better choice for you.

So should you buy or lease?

Every buyer’s situation is unique, but in general, buying is better suited to drivers willing and able to spend more upfront and drive their car for longer, or who want the freedom to sell or trade their car in for a new one whenever they want.

Leasing is generally a better deal for drivers who want to spend less in the short term, or who don’t mind spending more in the long term in exchange for getting a new-model vehicle on a regular basis.

A few tips for leasing

• Everyone knows the price of a new car you’re buying is negotiable, but not everyone knows the same is true for the capitalized cost of a car you’re leasing. You can also negotiate for a lower money factor and whether certain fees are included. (The exception is if you’re getting a manufacturer’s lease special.) Other items, like the residual value, aren’t negotiable.
• The cost of a lease is the capitalized cost minus the residual value. That means, all else equal, leasing a car from a brand that’s expected to hold its value better can be a better deal.
• Make sure there are enough annual miles included in the lease for your lifestyle. If you’re a frequent road tripper or long-distance commuter, a lease may not be the best fit.
• Advertised lease specials are often for a base-trim model with no frills. Read the fine print to ensure you’re making an apples-to-apples comparison when looking at your options.