If you’re in the market for a new car, you may wonder “is leasing better than buying?”
The choice between buying and leasing a car comes down to your financial situation, credit, and long-term plans. Monthly lease payments are usually lower, but you have nothing to show for all those payments at the end of a lease. On the other hand, you might pay more per month for a car loan, but at the end of the loan term, you own the car and can drive it payment-free for years to come.
So, is it better to lease or buy a car? First, let's look at what you need to know about leasing versus buying.
To figure out if car leasing is better than buying, you first need to understand exactly what a car lease entails.
Leasing a car is a lot like a long-term rental. A lease is an agreement between the lessor (the company that owns the car) and the lessee (the person who pays to borrow the car). You're allowed to drive the car for an agreed amount of time and miles. Your monthly lease payments are usually lower than that would be to buy the same car because they’re based on its usage rather than the full purchase price of the vehicle.
When you lease a car, you usually have to make an upfront payment, plus monthly payments. You get to use the car for several years, and at the end of your lease, you return the car to the lessor. At that point, you can decide to sign a new lease, buy a car, or go without a car.
Most leases last two to four years and limit the number of miles you're allowed to put on the car each year — usually around 12,000 per year, although you can get a high mileage lease if you need one. If you go over the mileage limit included in your lease agreement, you’ll have to pay an excess mileage fee.
Unless you choose to buy the car at the end of the lease — which involves paying the price outlined in the lease agreement — you never own a leased vehicle. This differs from a car loan because you actually own the car at the end of a loan and can sell it, trade it in for a different vehicle, or continue driving it without a monthly car payment.
Whether leasing is cheaper than buying depends on how you look at it. The monthly payments on a lease are usually lower than those on a car loan on the same vehicle. That's because your lease payment is calculated based on the vehicle's depreciation, or the difference between the car’s current value and its residual value, which is its expected value at the end of the lease (plus interest and fees).
When you buy a car, you pay the full market value of the vehicle, plus interest. That makes loan payments more expensive.
To see the difference between lease and loan payments for yourself, check out Edmunds' Lease vs. Buy Calculator.
If you plan on getting a new car in three years whether you lease or buy, then car leasing is clearly a better deal because you'll save $369 per month.
However, what if you plan on buying the vehicle and driving it for ten years? You would pay $775 per month in the first three years, but you wouldn't have a car payment at all in the last seven years. That could make buying less expensive than turning your leased car in and signing a new lease at the end of the three-year lease period.
A bad credit score will make buying or leasing more difficult. When you apply for a car loan or lease, the lender will run your credit. If you have bad credit, your application may be denied. If you are approved, the lender or lessor will charge a higher interest rate.
Still, buying a car might be a bit easier than leasing for people with bad credit. Auto loans use the car you're buying as collateral. If you default on the loan, the lender repossesses the car to recoup their losses. This means you're less likely to be denied an auto loan, even if you have bad credit.
Leasing is different. If you stop making lease payments, the dealer still owns the car, just like they always have. All they're left with is a car that's less valuable than it was when the lease began. For that reason, leasing companies are less likely to lease to people with bad credit.
There's no minimum credit score to qualify for a lease — different dealers and leasing companies set their own minimums. However, according to Experian, the average credit score of people leasing a car is 729, which is in the "prime" category.
For auto loans, the average score depends on whether you’re buying new or used. For new car buyers, the average credit score is 734. For used cars, it’s 663. So if credit problems are making it hard to get approved for a lease, you may have an easier time buying a used car.
If you're working on building or rebuilding your credit, you may wonder whether leasing or buying a car is better for your credit. There's actually not much difference from a credit scoring standpoint.
Both car leases and loans are reported as installment loans on your credit report, so as long as you make on-time payments, your positive payment history will help boost your credit score.
The one difference between leases and loans is in the amount of debt that appears on your credit report. When you purchase a car, the entire amount financed shows up on your credit report.
If you take out a $30,000 car loan, that is the amount of debt reported to the credit bureaus. When you lease a car, the vehicle's residual value doesn’t show up on your credit report. For example, if the $30,000 vehicle is expected to be worth $15,000 at the end of your lease, only $15,000 shows up as debt on your credit report.
One thing to keep in mind: not all leasing companies report to all three credit reporting agencies. Some lessors only report to one or two, and some may not report to credit bureaus at all.
If you've had your lease for 60 to 90 days and the lease isn't showing up on your credit report, call the leasing company and ask whether it's their policy to report leases to the credit bureaus.
Short of getting out of your lease early, there's not much you can do if your lessor doesn't report to any of the credit rating agencies. So, if you want to ensure your lease will appear on your credit report, consider asking about their credit reporting policies before submitting a lease application.
Does leasing a car build credit? Leasing a car can improve your credit score if you manage your lease well. Let's look at how your credit score is calculated and the ways leasing a car can affect your credit.
To summarize, leasing a car may cause a short-term drop in your credit score. But in the long term, leasing a car can improve your credit score — as long as you make your monthly payments on time.
Leasing tends to result in a lower monthly payment than financing the purchase of the same car over the same period. But one way to have a lower monthly payment on a car loan is to opt for a long-term car loan.
Many auto lenders offer car loans of six to eight years to help car buyers afford the monthly payment. But this kind of loan can be risky.
Long-term car loans make it easy to become "upside-down" on a car loan, meaning you owe more on the loan than the car is worth. Being upside-down may not pose a problem if you hold onto the car for several years. However, if the car gets stolen, totaled in an accident, or you want to sell or trade it in while your loan is upside down, you may need to come up with cash to pay off the loan balance.
Loans on new cars tend to go upside down more often than used cards simply because new cars lose 11% of their value as soon as you drive them off the lot. They lose another 15% to 25% of their value during their first year on the road.
However, if your heart is set on driving a new car every few years and you want to keep your monthly payments low, then leasing is the way to go. With a vehicle lease, depreciation is factored into your lease payments. If the car loses value faster than expected, it won't affect your lease payments because you don't own the vehicle. You just return the car to the leasing company when your lease term is up. However, you can also decide on buying out a car lease, if you’re really interested in owning the car.
The decision to lease or buy is easier once you know your long-term goals. So do your research on the car you want to drive, shop around, and run the numbers through a lease deal versus buy calculator. You'll be ready to sign a lease term agreement or loan agreement and drive the car of your choice off the lot in no time.
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).
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