Car Leasing vs. Buying: What’s Best for You?

Kristi Cutts, Guest columnist

If you’re in the market for a car, you may also be considering whether to buy or lease. Either option comes with unique benefits, and ultimately your choice will come down to what best fits your current situation and future plans. Let’s take a look at some of the differences between the two.

Process Differences

When you buy a car with a traditional auto loan, you borrow money for the purchase from a lender, such as a credit union or a bank. The lender then collects payments on the debt each month, with a portion of each payment going toward interest and the rest paying down the principal on the loan. As you pay down your principal, you build up your equity until at the end of the loan, you own the car – an asset that’s all yours.
Leasing differs in that lessee’s make monthly payments to drive a car for a term – usually about three years. When you lease, rather than borrowing and repaying the full purchase price of the vehicle, you’re instead covering the cost of depreciation – the difference between when it was new and its expected value when the lease ends – plus finance charges. Leases place certain restrictions on you, however, most notably that you must return the car in good condition at the end of the lease (anything more than regular wear and tear will likely cost you).

Monthly Payments

For the budget conscious, one of the main considerations when deciding whether to buy or lease would be the difference in monthly payments. Generally, it’s less expensive to lease a vehicle than it is to buy. This is because a lease only requires lessees to pay for the difference between a car’s new value and its expected value at the end of the term, while car buyers must pay for the full price of the car.

Life with a Lease

Leases place certain restrictions and limitations on you that aren’t part of the deal when you buy. These may or may not matter much, depending on how you plan to use the car – but they’re worth considering regardless.

First, many leases place restrictions on how much mileage you can put on the car. If you mostly drive locally, with occasional longer trips, you’ll likely be just fine – but if you’re planning a road trip for spring break, it might be best to keep your leased car in the garage.

Next, dealers expect the car to be returned at the end of the lease in about the same condition as it left. If you make a mess of your car, or if you’re prone to dings, scrapes and scratches, you’ll be on the hook for additional costs associated with getting the car looking spiffy again upon its return.

Some leases may specify that oil changes and scheduled maintenance will be included at no additional cost during the duration of the lease – but you’ll probably still be required to cover items such as tires.

Future Planning

A major difference between leasing and buying is what comes at the end.

At the end of a lease, you return the car to the dealership – at which point you face the question of what to do next: do you sign another lease, purchase a car, or go without? Many lessees lease one car after another, which keeps them in a car at a predictable price. The drawback is that those payments can continue indefinitely.

When you pay off a car loan, the vehicle is totally yours and you can decide what to do with it. You can continue to drive it for years, paying only for maintenance and repairs, or you can decide to trade it in or sell it for a new car. Either way, once the loan is paid off, your monthly expenses on your car are reduced to whatever it takes to keep your car running.

Online resources can help you calculate the costs of buying a car vs. leasing. Calculators can tabulate what your monthly payments might be, and even help to pin down your total net costs, giving you a good idea of what you’ll have to budget for when it’s time to get yourself a vehicle.

Your decision to lease or buy should always reflect your situation. Think realistically about your wants and needs for a vehicle, and make the best choice for you.

Note: Financial Corner is a direct response to student requests for more information on navigating money matters. The tips are provided by Kristi Cutts, branch manager of UW Credit Union’s UW Oshkosh branch.