Cars are expensive. Their prices can be out of reach for many shoppers. Even with long-term auto loans, it can be tough to afford a new car. Fortunately, car leasing allows consumers to get behind the wheel of a new vehicle with a monthly payment that’s usually lower than it would be if you purchased it. Leasing allows you to replace your car every few years while maintaining relatively low monthly payments.
Once a part of the market reserved for businesses and luxury car shoppers, new car leasing is now common throughout the automotive marketplace, from subcompact cars to luxury SUVs and pickup trucks. According to the Experian credit bureau, about three in 10 new cars driven off new car dealer lots are leased, rather than purchased.
Is it Better to Lease or Buy a Car?
There’s no easy answer to the question of whether it is better to buy or lease a new car. Each method has its pros and cons. While you can typically get lower monthly payments with a lease, you never really own the vehicle. Lease customers are subject to strict mileage limits and must keep their car in near-showroom condition throughout the lease. At the end of the lease, you have no equity to use toward a down payment on your next vehicle.
Buying a car is naturally more expensive since you have to pay the entire purchase price of the vehicle. However, once you pay off your loan, your payments end. Any equity you have in the car can be used toward the purchase of a new car. In many cases, your sales taxes are higher with a purchase than a lease.
This guide will explore the pros and cons of car leasing and car buying in detail. We’ll then talk about how to lease a vehicle and how to purchase one.
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What Is Leasing?
Leasing is like renting a car for an extended period. Instead of paying the full purchase price, like you would if you were buying the vehicle, you just pay for the amount of depreciation that is expected to occur during the term of the lease, plus interest and fees. Most auto leases are closed-end leases, with the residual value at the end of the lease locked in before you even drive off the lot.
You usually, but not always, have to make a down payment on a leased car. The remainder of the lease cost is split into a series of equal monthly payments that include interest. Typical lease terms are for two or three years, though a lease agreement can be written for almost any length.
While leasing sounds simple in concept, getting a lease is a complex financial transaction that even comes with a vocabulary that’s different than car buying. Here are a few terms you’ll want to know if you’re considering a car lease:
Capitalized Cost: A vehicle’s capitalized cost (also known as cap cost) is the price of the car. Like with a car purchase, you should negotiate to get this price as low as possible. With most automotive-sponsored lease deals, this price is fixed. With most other leases, it’s important to haggle to get this price as low as possible.
Any discounts off the capitalized cost, such as special lease deals from automakers, are called cap cost reductions.
Residual Value: The residual value of a leased car is an expert’s opinion about its expected value at the end of the lease term. A residual that is a higher percentage of a vehicle’s cap cost is good, while a low residual forces you to pay a higher portion of a car’s capitalized cost.
Different cars depreciate at different rates than others. Your best lease deals can be found on cars that depreciate the least, and have higher residual values.
Money Factor: It would be way too easy for leasing companies to use an interest rate when discussing lease contracts. Instead, they use a number called the money factor to represent the amount of interest that’s included in each monthly payment.
To convert the money factor to a more familiar interest rate, you multiply it by 2,400. You can either do the math yourself or use an online money factor calculator to perform the conversion for you.
What Do You Pay for With a Car Lease?
The cost of the lease is the capitalized cost minus the residual value, plus interest (the money factor) and several fees. In addition to lease origination costs, you’ll also have to pay registration fees, just as you would with a car purchase.
For example, let’s say you’ve found the perfect Mercedes-Benz SUV. It has a capitalized cost of $50,000 and a residual value after three years of $30,000. To lease the luxury SUV, you’ll have to pay the difference between the two numbers ($20,000) plus interest and fees. If they ask for $3,000 plus fees upfront, the remaining $17,000, plus interest, is split into a series of equal monthly payments. Payments will last until the final lease month. Then you have to return the vehicle to the dealership.
Dealerships will usually refer to the down payment, any lease fees, security deposits, and the price of registration as drive-off costs.
What Is Car Buying and Financing?
Car buying is the traditional and still most popular way to get behind the wheel of a new ride. You negotiate a price for a car, truck, or SUV and usually take out a car loan to pay that price, minus the price of your trade-in or down payment. If the vehicle costs $32,000 (and you don’t have a trade-in or down payment), then you’ll pay the full $32,000, plus the cost of interest on your car loan if you have one.
When you finance a car, the lender holds the title to the vehicle until you pay off the loan. You then get the title and own the car free and clear.
Most new car loans come from banks, credit unions, and finance companies. After applying for a loan and receiving approval, the lender sends the money to pay for the vehicle. You then pay back the balance of the loan (its principal) through a series of equal monthly payments that include both principal and interest. The length of an auto loan is called its term. Terms vary from just a few years to as many as seven or eight. Many experts advise shoppers not to get car loans that exceed five years. However, that limit is frequently ignored by buyers chasing affordable monthly payments. Check out our guide on long-term car loans to find out why that’s a bad idea.
What Are the Benefits of Leasing a Car?
There are several distinct advantages to leasing versus buying, including:
- Lower monthly payments than a loan on the same vehicle.
- The latest technology with a new car every few years.
- Your car will always have warranty coverage.
- Trading-in a leased vehicle is easy.
- You may save some money on sales tax.
- You could have a lower down payment.
Lower Monthly Payments
Since you are only paying for the depreciation that is expected during your time with the car, rather than the entire cost of the vehicle, your monthly payments are generally lower with a lease than a purchase. While it is critical you find an amount that fits into your monthly budget, buying on the size of the payment alone is not a great way to get a car. Instead, you want to look at the total vehicle cost.
Because the monthly cost of a lease is lower, you may be able to get a nicer vehicle, a higher trim level, or extra options with the same monthly payments as you would have with a purchase.
One factor driving higher car prices is the vast array of high-tech safety, infotainment, and connectivity features available on new cars. When you lease vehicles every few years, you’ll always be able to get the latest technology. That includes features such as automatic emergency braking, adaptive cruise control, and lane-keeping assist. If you need to purchase a used car to meet your budget, you might have to sacrifice the latest technology.
Infotainment and connectivity features such as Android Auto, Apple CarPlay, and Amazon Alexa are now common on even the cheapest new vehicles, but they weren’t just a few years ago. With a lease’s lower monthly payments, you may be able to drive a higher-tech, but more expensive, hybrid model. That can save significant money at the gas pump.
Warranty Coverage and Maintenance
Unless you get an unusually long lease agreement or go well over the contract’s mileage limit, you’ll likely be covered by the vehicle’s factory warranty for the entire lease. You should not have to worry about paying for any significant warranty-covered repairs, as the dealer’s service department should take care of them at no cost. Of course, if you damage the vehicle, you’ll be responsible for paying for those repairs.
With some leases, periodic maintenance is included for some or all of the lease term. Though you’ll pay for the perk as part of your monthly lease price, it can give you a stable, predictable cost of ownership.
Trading-In Is Simple
When it comes time to sell a used car, it can be a hassle. With a lease, you don’t have to worry about selling or trading-in your used car. You don’t even have to worry about its value.
At the end of a vehicle lease, you simply return the car to the dealership where you got it, or in some cases, another of the same brand’s franchised new car dealers. There will likely be a few fees and paperwork, especially if you went over the allowed mileage limit or otherwise damaged the vehicle.
What you won’t have to do: haggle over the value of the car. The car’s residual value is set at the beginning of the lease, and won’t change at the end of the contract. Naturally, most lessees won’t drop off the car and walk away. Instead, the end of one lease will mark the start of their next new car lease.
You May Save Some Sales Tax
Though tax policies vary by location, leasing a car can save you quite a lot in sales tax. In some jurisdictions, you only have to pay sales tax on the amount of your down payment, plus the total of all of the contract’s monthly payments. Some places, however, force you to pay sales tax on the entire price of the car – just as if you had purchased it. In those places, one of the top attractions of leasing goes away.
When you purchase a car, you’re generally liable for sales tax on the entire purchase price of the vehicle, minus the value of any trade-in. In some places, you don’t get credit for the trade and have to pay tax on the entire purchase price.
Before you lease a car, it’s a good idea to check with a tax professional who is familiar with the laws where you live. Some tax laws related to leasing are found in cities and counties, rather than entire states.
Potentially Smaller Down Payment
Though not always the case, many leases come with smaller down payments than new car purchases. In fact, some contracts come with nothing due at signing. Though the monthly payments are higher, some leasing advocates encourage shoppers to negotiate leases with the smallest down payment possible. Their thinking is that if you pay a substantial amount upfront, and your car is declared a total loss or is stolen, the amount you paid at the beginning of the lease is lost. With a smaller down payment, you’ll have less to lose if something awful happens to the vehicle.
What Are the Downsides of Leasing a Car?
While leasing has its benefits, it’s definitely not the best solution for everyone. There are several disadvantages to leasing that you should consider before you lock yourself into a multi-year contract:
- You don’t own the vehicle.
- You always have a car payment.
- There’s a mileage limit.
- You can’t customize your ride.
- You won’t get any cash when you trade-in.
- There can be surprising lease-end costs.
- There are restrictions on how you can use your vehicle.
- It can be hard to get a lease with bad credit.
- You need gap insurance.
- Leasing can be complicated.
- Lease deals are limited.
- You can’t get your vehicle fixed just anywhere.
- You have to return it in great shape.
- A lease is a binding contract.
You Don’t Own the Vehicle
When you lease a car, the leasing company holds its title. You never have an ownership interest in the vehicle. It’s like renting an apartment versus buying a house.
Since the leasing company owns the vehicle, they can place strict limits on how you can use the car, how you can customize it, and in some cases, where you can drive. For example, with some leases, you have to get special permission before taking the car into Canada or Mexico. If you don’t follow the rules of the contract to the letter, the lease declared in default, and your vehicle can be repossessed.
If the vehicle is stolen or declared a total loss, any insurance payments go to the leasing company. You have to start fresh with a new lease agreement, even if you’ve recently paid thousands of dollars to start your previous lease.
You Always Have a Car Payment
When you lease cars, you will always have a car payment. With a vehicle that is purchased and financed, the payments end once the loan is paid off. With a car loan, your payments are also likely to be more consistent than lease payments. Here’s why: Most car loans last four to six years and the payments are the same each month. With a lease, you’ll get a new monthly lease payment amount each time you get a new car, which is likely going to be every two to three years. As vehicle prices are rising, you can expect the lease payments on each successive lease to be higher than the last.
There’s a Mileage Limit
Vehicle leases almost universally come with strict mileage limits. Exceed the mileage cap, and a lease can get very expensive, very quickly. Though it depends on the type of car you lease and the leasing company, most excess mileage charges range from 15 to more than 40 cents per mile. If, for example, you have a 25 cent-per-mile excess mileage fee and you commute 20 miles to work, each round-trip will cost $10.
Shoppers with no idea how many miles they drive each month are poor candidates for getting a car lease.
Many lease advertisements will show an annual mileage limit. Leasing companies typically don’t check the mileage after each year to make sure you’re under the cap. Instead, they’ll multiply the annual allowance by the number of years in the contract to determine a total lease cap. On a three-year lease with 12,000 miles allowed per year, for example, you can drive 36,000 miles before you turn the car in at the end of the contract.
Before you even think of leasing a car, you must have a reasonable estimate of the number of miles you annually drive. Since the number of miles you’re expected to drive is priced into the lease, traveling drastically fewer miles than the contract allows is as much of a waste of money as going over mileage. You will have paid for miles you didn’t drive.
You Can’t Customize Your Ride
Some drivers like to make their cars stand out with customized wheels or other accessories. If that’s you, leasing is probably not the right choice. Most leases require you to return the car in the same condition it left the showroom, with some reasonable wear and tear.
Even if you think the customizations add value, the leasing company will probably disagree. They would rather have the car back on its factory wheels, for example, rather than the large wheels and low-profile tires you added.
In short, you don’t want to do anything to a leased car that you can’t undo when it’s time to return it to the dealership.
No Cash For Your Next Car
While there are ways to get a small amount of cash back at the end of your lease, most lessees will walk away at the end of the contract with nothing to put forth as a down payment on their next car. On the contrary, many lease customers will have to pay excess mileage, excess wear, or disposition fees at the end of their contracts.
What that means is you’ll have nothing to pay upfront for your next lease. Unless you can find a zero-down lease deal, you’ll have to dip into your savings or go without a vehicle until you have the cash for your next lease signing.
Surprising Lease-End Costs
As we have mentioned in previous sections, the amount of money you owe at the end of the lease can be surprising. You may not just be able to drop your car off and walk away. Estimating the amount you’ll owe in excess mileage costs is pretty straightforward. Determining what excess wear costs a dealership may want to claim is harder to guess. They’ll likely have considerable latitude as to what to charge, and the amount of flexibility they have may be based on your willingness to lease another vehicle from them.
Many lease contracts stipulate a credit card test to determine what damage is and is not excessive. If it can be entirely covered by a template the size of a credit card, they’ll let it slide. If it extends past the borders of the credit card-sized template, you’ll have to pay to have it repaired. Unless it’s a minor nick, you’ll likely have to pay for any glass damage, even if it’s small enough to be covered by the credit card template.
It’s a good idea to give the interior a good cleaning before you plan to return the car. Interior defects that you’ve learned to ignore may be a chance for the dealer to charge excess wear fees.
When you own a car, you can generally use it however you please. That’s not true when you lease a vehicle. Leasing companies can detail where you can drive and whether you can use your car for business. You may not be allowed to drive it to Canada without written permission or take it to Mexico at all. To be fair, however, some lenders also don’t allow financed vehicles to leave the country until their loans are paid off either.
Shoppers looking for cars to use for ride-hailing tasks like driving for Lyft or Uber need to carefully consider whether leasing is right for them. Some leases preclude such use outright, while others have such strict mileage caps that using them as virtual taxis can get very expensive. Beyond possible mileage overages, such use can cause quite a bit of wear and tear to the interior, which you’ll pay for at lease-end.
The bottom line is that unless you plan to use the car for anything beyond routine driving, you’ll want to check with the leasing company or have an attorney review the lease. You must ensure that such use does not violate the term of the contract.
Leasing With Bad Credit Can Be Tough
Though there are leases available for consumers with poor credit, leasing is typically reserved for shoppers with good to excellent credit scores. According to the credit bureau Equifax, only 8.5% of leases originated in September 2019 were to consumers with subprime credit scores.
To get the best lease deals, including those offered as incentives by automakers, you’ll need excellent credit. While shoppers with lousy credit can lease vehicles, it’s typically much more expensive and complicated for them to do so. Not only will the money factor (interest rate) on the lease be much higher than it would be for a shopper with good credit, but the leasing company may attach additional stipulations into the contract.
Well before you consider leasing a new car, you should check your credit score and the credit reports behind your score. Fixing mistakes on credit reports and improving your credit score takes time. If the first time you hear about problems in your credit report is when you’re sitting in a dealership’s finance office, your dreams of getting a good deal will quickly vanish.
You Need Gap Insurance
Nearly every lease contract requires lessees to purchase gap insurance. It pays off the amount you still owe on your lease if the vehicle is stolen or declared a total loss. Even if it’s not required, it’s a good idea to have the coverage on any leased vehicle. If you don’t, you can be out several thousand dollars if something horrible happens. The lessor won’t just write-off what you still owe on the lease; they’ll expect you to fulfill the terms of the lease agreement and continue making payments.
Gap insurance is also available to protect car owners with upside-down auto loans, where they owe more on the car than it is worth.
You will almost certainly be offered gap insurance in the dealership’s finance office. What they won’t usually tell you is that you don’t have to buy it from them. Instead, you should shop for gap insurance from a variety of sources, including the dealership, your car insurance company, and even your bank or other financial institution. If you have an insurance quote from an outside source when you visit the dealer, they’ll either have to meet or beat that offer if they want to sell you the coverage.
Sometimes a lease contract will have gap coverage included in the amount upfront and the monthly payments. It’s crucial that you read the paperwork to see what is covered, and the cost of that coverage.
Our guide to gap insurance explains the coverage in more detail.
Leasing Can Be Complicated
Most consumers understand how to buy a car and get a car loan. One of the cons of leasing is that it’s less straightforward, especially for consumers who have never leased a vehicle before. Not only do you have to understand the unique lingo of leasing, but you also need to know how to figure out the cost of the lease, and be prepared to go over the contract with a fine-toothed comb to avoid costly surprises.
Though it would cost you a bit of money, it’s a good idea to have an accountant or attorney go over the lease before you sign. The small investment in professional advice might save you thousands of dollars in the long run. If the dealership or leasing company balks at the delay caused by an expert review, or won’t allow you to see the contract before it’s time to sign, you should consider it a red flag and walk away from the deal.
Lease Deals Are Limited
When cars aren’t selling at the pace automakers desire, they frequently offer lease deals to pick up the sales pace. While affordable lease incentives can be a pro of leasing, the terms and conditions of the deal can move them into the con column.
Lease deals are only available to shoppers with excellent credit. They’re also only available on specific models, which can be hard to find and limited in the equipment they include. With most leases, you can negotiate many of the lease terms, including the capitalized cost. With lease deals, the terms are non-negotiable.
You Can’t Get It Fixed Just Anywhere
When you have a leased vehicle, your maintenance costs may be higher than they would be on a car you own. You not only need to demonstrate that all required periodic maintenance has been performed, but you also have to show that it’s completed to factory specifications. While a leasing company or automaker can’t generally require you to use specific shops, they can demand that you use factory parts. They can be more expensive than aftermarket parts.
Where you can get burned with such requirements is if your car has collision damage that was repaired. Some insurance companies will require the shop doing the bodywork to use less expensive aftermarket replacement parts. Those parts may not be considered satisfactory by your leasing company.
You Have to Return It in Great Shape
Unless you want to incur significant fees at the end of your lease, you have to return the car in the best possible shape. Other than normal wear and tear, the vehicle needs to be as close to showroom condition as possible when the lease period ends. While you might not get that parking lot dent fixed on a car you own, you’ll have to do so on a leased car unless you want the dealer to charge you to have it done.
It’s a Binding Contract
A lease is a contract between you and the leasing company. If you break that contract by failing to make your lease payments or returning the car before the contract is up, the financial penalties can be hefty. If you have a three-year lease, for example, you’re generally committed to that car for three years. If you owned the vehicle, you could sell it whenever you want to.
Breaking a lease can seriously damage your credit, making it difficult, more expensive, and possibly impossible to lease another car for the better part of a decade. A lease default and repossession can leave you without a car, and without an easy way to get replacement transportation.
There are a few ways to terminate a lease early. Our guide to getting out of a car lease explores your options.
What Are the Benefits of Buying a Car?
Buying a car has its own pros and cons. Some of the positives of buying a car include:
- You own the car.
- You can drive as much as you want.
- You can get cash to pay for your next car.
- You can make it your own.
- You won’t have to make payments when the loan is paid off.
- You can sell on your own schedule.
- Financing is easier than leasing.
- Refinancing can save you money down the road.
- You can fix it or not.
You Own the Car
By purchasing a car outright with cash, you own it immediately and can do whatever you want with it. If you have a car loan, the lender holds the vehicle title until you pay off the financing. However, they don’t typically put any restrictions on what you can do to or with the car.
If you have a car loan, you own a little more of the vehicle with each car payment. Your equity grows slowly at first, as much of each payment goes toward interest. As you get further into the loan, the amount of interest declines, and your rate of gaining equity increases. It’s that positive equity that gives you great flexibility when it’s time to get a new car. Lessees never have equity in the vehicles they drive.
As long as your gains in equity outpace depreciation, you’ll have positive equity in the car. Since new cars depreciate quickly in their first couple of years on the road, it can be hard to retain positive equity. It is especially true if you have a very long car loan. The best way to maintain positive equity is to make a sizable down payment and get the shortest loan term you can afford.
You Can Drive and Drive and Drive
Nearly every lease contract has a mileage cap. Exceed it, and you’ll pay hefty fees at the end of the contract. That’s not the case with a car you own outright or have a car loan on. You can leave the dealer’s lot and drive as far as you want with no penalty. That’s why buying a car makes much more sense if you drive a lot of miles.
Beyond the costs of fuel and maintenance, there’s no financial penalty for driving long distances.
You Can Get Cash to Pay For Your Next Car
Because you either start with equity when you pay cash for a car or gain equity as you pay off your loan, you should get some money when you decide to sell it and get your next vehicle. You can use the cash from a private-party sale or trade-in as a down payment on a new ride. With a lease, you never have equity to use on a future vehicle.
For example, we’ll say your $40,000 SUV is worth $12,000 when it’s five-years-old and its loan is paid off. You can put that $12,000 value toward the down payment on your next SUV. You can get the maximum value out of a car by selling it yourself. Still, many consumers find it easier just to trade it in to the dealer where they’re buying their next vehicle.
Make It Your Own
When you own a car, you can do far more than hanging a set of fuzzy dice off the rearview mirror to make it your own. The depth of your wallet and the limits of good taste are the only limits to the amount of customization you can do to your vehicle. Even if you have a car loan, there are few things you can’t do to a car you’ve purchased.
If you make changes that add value to the vehicle, you can recover at least some of your money when you sell the car. If the vehicle were leased, you’d have to remove the added equipment before taking the vehicle back to the dealer. You would never get a return on your investment.
No More Payments When the Loan Is Paid Off
When you make the final payment on a car loan or pay cash upfront, you don’t have to pay any more. That alone is an excellent argument for getting a short car loan and keeping your car for a long time. If you, for example, buy a new pickup with a four-year car loan but keep it for seven years, you’ll have three years free of car payments. Every month you drive a leased vehicle, you will have a car payment.
Savvy shoppers can use that strategy to pre-finance their next car purchase. During those periods where you’re not making payments to a lender, you can put the same amount of money in a savings account. When you’re ready to buy another car, the money you saved can be used to make a massive down payment. If your current vehicle requires an expensive repair, your reserve fund can also be used to fund that expense. That way, you don’t have to resort to carrying a balance on a credit card with a high interest rate.
You Can Sell on Your Own Schedule
When you own your vehicle, you can sell it whenever you want. While it’s a good idea never to sell until the car is paid off, you have the option to do so if you wish. With a lease, you’re essentially trapped until the contract is up unless you can find someone to assume your lease.
The flexibility of selling when you want allows you to change vehicles as your needs change. Baby on the way? Ditch that Mazda Miata for a Honda CR-V. Find a car that’s super-reliable and meets your needs: Keep it forever.
Financing Is Easier Than Leasing
Getting a car loan is easier for most consumers than getting a lease. Not only are credit score requirements typically lower for a loan, but the process is also more familiar to most shoppers. Though they’ll pay a higher interest rate, subprime borrowers will usually find more financing options than lease opportunities.
Finding the best possible deal on a car loan is easy. With many lenders offering streamlined loan applications online and several sites offering multiple quotes with one application, lenders will fight for your business with relatively little effort on your part. It’s a good idea to have a preapproved financing offer in place before you get anywhere near a car dealership. The dealership may be able to find a loan offer that beats the one you have, but they’ll have little incentive unless they know they have to compete to earn your business.
APR Range: 1.99% – 27%
Loan Term: 24 – 84 months
Loan Range: $8,000 – $100,000
At least 18 years old, resident of the U.S. (except Alaska and Hawaii), with min. income of $1,800/month and min. credit score of 500
Max mileage of 125,000 miles, 10 years old or newer
myAutoloan presents up to four offers from a variety of participating lenders based on your specific loan requirements, offering a wide variety of choice and selections.
APR Range: 3.34% – 17.49% (AutoPay Discount of 0.50% also included)
Loan Term: 24 – 144 months
Loan Range: $5,000 – $100,000
Must have good to excellent credit*
LightStream caters heavily to applicants with very strong credit scores, offering a streamlined application process and a Rate Beat program that guarantees they’ll beat any other qualifying offers an applicant receives.
APR Range: 3.99% – 10.08%
Loan Term: 36 – 72 months
Loan Range: $4,000+
$1,800/month minimum income requirements, resident of the U.S. (except Alaska or Hawaii)
Limited to vehicles available through the Capital One network of dealers
Capital One offers a pre-qualification, which allows you to take your offer to any participating dealer within 30 days.
APR Range: 4.29% – 24.99%
Loan Term: 48 – 72 months
Loan Range: $4,000+
At least 18 years old
Limited to vehicles available through the Chase network of dealers, no older than 2008
After your application is approved, Chase will send the information to the dealer you choose. The offer is good for 30 days.
|Bank of America||
APR Range: 3.49+%
Loan Term: 12 – 75 months
Loan Range: $7,500 – $100,000
At least 18 years old (19 in Alabama or Nebraska) U.S. resident
Max mileage of 125,000 miles, 10 years old or newer, valued at $6,000+, plus additional restrictions
Bank of America Preferred Rewards clients can receive an interest rate discount of 0.25-0.50% depending on their tier at the time of applying for an auto loan.
Disclaimer: All information provided here is based on Annual Percentage Rate estimates from the websites of the individual lenders on 12/18/2018. It is not a binding or guaranteed loan offer. Individual auto loan rates will vary.
Notes: In compiling this data, we used new-car purchase rates for Virginia.
*To meet LightStream’s standard for good credit, you must have several years of credit history with a variety of account types, including credit cards, installment debt (vehicle loans), and mortgages. LightStream also prefers to see few, if any, delinquencies and a history of savings, evidenced by things like deposit accounts and manageable revolving credit card debt. You’ll also want to provide proof of stable and sufficient income to repay current debt obligations as well as any new loan with LightStream.
Refinancing Can Save You Money Down the Road
With a lease, the payment you have when the contract starts is the payment you’ll have throughout the lease term. With car financing, you can refinance the loan to lower its interest rate and monthly payments or change its duration. While it’s generally not a good plan to lengthen your loan by refinancing, shortening its term can save you a tremendous amount of money.
Refinancing a car loan is an excellent idea for buyers who had iffy credit when they first took out the loan, but have a couple of years of making their loan payments on time to boost their credit score. According to the credit bureau TransUnion, car owners who refinance their car loans lower their interest rates by an average of 2.4%.
Compare Auto Loan Rates
View rates for new cars, used cars, or refinancing. Get four offers so you’re prepared before you visit the dealer.
You Can Fix it … or Not
Leased cars must be returned in as close to their original condition as possible. When you own a car, you can repair damage or mechanical issues on your own schedule or when your budget allows. You’re not limited to expensive factory parts, though using aftermarket parts can affect your warranty coverage.
While it’s never a good idea to let collision damage go unrepaired, as small problems can become bigger ones, it’s up to you to decide when and where to get the work done.
What Are the Drawbacks of Buying a Car?
While there are many pros to buying a car, there are several cons, such as:
- Buying a car is more expensive in the short term.
- You have to pay interest on the entire cost of the car.
- You may have to pay more sales tax.
- You should make a large down payment.
- The car’s future value is unknown.
- The warranty will end.
Buying a Car Is More Expensive in the Short Term
Monthly car payments are almost always higher than the lease payments on an equivalent car. That makes them more expensive to drive on a per month basis while you have a car loan. When the loan is paid off, however, having a car you own is cheaper each month.
There are ways to manage the size of your car payment. The best way is to make a sizable down payment. You can do that by saving money before looking for a new ride and by maximizing the amount of money you get for your current car. In most cases, you can sell your vehicle to a private party for more than you’ll get when you trade it in to a dealership.
You can also lower your monthly payment by extending your car loan. Be careful with this strategy, however, as you can end up paying significantly more for your vehicle in the long run. Our guide to long-term car loans talks about this subject in detail.
You Have to Pay Interest on the Entire Cost of the Car
When you lease a car, you only have to pay interest on the depreciation that is expected to occur during the lease term. When you buy, you have to pay interest on the entire cost of the car, minus your down payment and trade-in.
Let’s look at an example. If you’re purchasing a new SUV that costs $40,000 and you make a $5,000 down payment, you’ll be paying interest on a $35,000 car loan for four to six years. Now let’s say the same SUV has a residual value of $25,000 after three years. If you have $5,000 due at lease signing, the remaining $10,000 will be divided into 36 equal monthly payments that include principal and interest.
Given a loan interest rate and lease money factor that are the same, you can plan on spending several times as much interest on the car loan as you would on the lease. With the loan, you’ll pay interest on $35,000. With the lease, you’ll only pay it on $10,000.
You May Have to Pay More Sales Tax
In most jurisdictions, the amount of sales tax you pay is based on the negotiated price of the vehicle. In some states, you can deduct the amount of your trade-in, but you’ll still likely have to pay tax on the majority of the vehicle cost.
If you lease, on the other hand, you’ll likely only have to pay sales tax on the amount due at signing and your monthly payments. In some jurisdictions, however, you have to pay sales tax on the capitalized cost, so leasing would not offer you any tax advantage.
It is a good idea to talk with a tax professional who understands your specific financial situation before making a lease versus buy decision based on taxes. You should not rely on the vehicle salesperson, as they may be an expert in selling cars, but they’re probably not a tax professional who is familiar with your finances.
To Get the Best Terms, Make a Down Payment
To get the best loan rate and shortest term on a car loan, you need to make a generous down payment. Doing so lowers your loan-to-value ratio (LTV) and makes your loan less risky and more attractive to lenders.
With many leases, the amount you put down will typically only change the monthly payment.
The Car’s Future Value Is Unknown
While you may be able to predict a car’s resale value several years down the road, there’s absolutely no guarantee your estimate will be accurate. With a lease, the amount the vehicle will be worth at lease-end is declared in the lease contract before the lease ever begins.
Market forces, reliability data, and your car’s mileage and condition can lead to huge swings in its expected value. When you don’t know its value, it becomes harder to budget for your next car.
The Warranty Will End
Most new car warranties are long enough to cover the length of the majority of new car leases. When you own a car, however, there’s a good chance you’ll have it longer than the warranty term. After the warranty expires, your wallet will be exposed to paying for expensive out-of-warranty repairs.
The risk of having a car that requires costly repairs can be mitigated in a couple of ways. First, look at the vehicle’s predicted reliability score in our new car rankings and reviews. The higher the score, the more likely you can dodge major mechanical repairs. You can also look for cars with long warranty coverage. Every model from Kia and Hyundai comes with 10 years or 100,000 miles of powertrain coverage.
How Do You Buy a Car?
There are three primary tasks you need to think about when buying a new car: Finding a vehicle that meets your needs and fits your budget, finding the best deal on financing, and negotiating a great price.
The U.S. News & World Report Best Cars rankings and reviews will help you out with the first task. Designed to answer the questions shoppers ask when looking for vehicles, our reviews are based on the consensus opinion of the country’s top automotive journalists. Their views are blended with quantitative data about predicted reliability, safety, and a host of other factors. You can look at vehicles side-by-side using our car comparison tool.
To get the best deal on financing, it’s crucial you get a preapproved offer from a bank, credit union, or another lender before you start visiting dealerships. Not only does it help you set a budget, but it can also give you early warning about any issues with your credit. It provides dealers with a benchmark they have to beat to earn your financing business.
When you apply for a loan, you’ll be asked for detailed information about your income, expenses, debt, and employment status. That information will be used alongside your credit score to determine whether you are sufficiently creditworthy to get a car loan (and what terms will be offered). While you may be tempted to embellish the information on your car loan application, doing so can result in an immediate rejection or a later repossession of your vehicle.
Next, you’ll want to look for any financing or cash back offers on vehicles you are considering. Our new car deals page shows some of the best available each month. Taking advantage of a rebate or low-interest financing deal can save you thousands of dollars over the term of the loan.
It’s a good idea to start your shopping virtually. By looking at dealer websites, you can see who has the best inventory of models you’re considering. Then, you can contact their internet sales department and start your initial price negotiations. Only when you have a good idea of what the car will cost should you visit a dealership in person. You’ll need to take a test drive in the specific vehicle you’re looking to buy, not just a similar model.
Once negotiations start, the dealer will try to keep you focused on the monthly payment. As a buyer, however, you’ll want to be focused on the total drive-away price of the car. If an experienced salesperson is successful in blending the car’s price, its monthly payment, and your trade-in together, it can get very confusing. At that point, it’s easy for them to incrementally move you to the deal they want to give you to take, not the deal you want. It also allows them to pack the deal with expensive add-ons that you’ll want to skip or find from less expensive sources outside of the dealership.
Our guide to negotiating a car price discusses the haggling process in-depth.
Once you’ve negotiated a price, there are a few more things you need to do before you can take your new vehicle home. You’ll need to sign the paperwork to finalize the sale. You shouldn’t rush through this step, and you should make sure all of the documents are accurate and complete. Never sign a document that has errors or blank spaces. Insist they are correct and complete before you sign.
Auto insurance is a product that no one wants to buy, but we all have to. Our car insurance hub will help you determine the coverage you need, any discounts you should pursue, and the best insurance company for your circumstances.
How Do You Lease a Car?
Many of the initial steps in leasing a car are the same as when you purchase a vehicle. You need to find a car that meets your needs and budget. To save money, choosing a vehicle with a high residual value will help keep your payments low. Of course, you’ll want to negotiate based on the total lease cost, not the monthly payment. We’ll show you how to compute that total in a moment.
One thing many lease customers don’t realize they can do is haggle over the capitalized cost of the vehicle. Unless it’s a special lease deal from an automaker, you can and do want to negotiate the lease’s cap cost. You can find the latest offers on our lease deals page.
You can negotiate some upfront costs and end-of-lease fees. However, others, such as vehicle registration costs, cannot be negotiated.
The paperwork required to start a lease can be complicated. Naturally, you should never sign a document you don’t understand, so you might need to run them by an attorney before you lock yourself into the contract. If anyone pressures you to sign papers that are confusing or you can’t understand, it’s a good time to pause and seek professional assistance.
Just like with a purchased vehicle, you don’t want to drive off the dealer lot without having the car adequately covered with the right auto insurance. On a leased car, that means having a gap insurance policy in place.
How Much Does Your Car Really Cost?
Knowing how to compute the total cost of both lease and purchase deals is the best way to compare offers and see if you’re getting a good deal. Fortunately, it’s pretty easy to determine the total costs of both options. Whether you choose to buy or lease, it’s essential to do the math yourself. Leaving it to the salesperson invites manipulation of the numbers. It doesn’t do anything to help you understand the individual components of the transaction.
Computing the Cost of a Lease
With most leases, the easy way to get an idea of the total cost is by multiplying the monthly payment by one less than the number of months in the lease contract, then adding the amount due at signing. You subtract one from the number of months in the lease term because the first payment is generally included in the amount that is due at signing. That’s not always the case, so it’s a good idea to check the lease documents to be sure.
Here’s an example: An automaker is offering a compact SUV with payments of $249 per month for 36 months with $2,499 due at signing. Multiply $249 by 35, then add $2,499. The total cost of this lease would be $11,214.
How does that compare to a lease on a similar vehicle with a $199 monthly payment for 36 months, but $3,499 due at signing? Using the same formula, we’ll multiply $199 by 35 and add $3,499. The total cost of the lease is $10,464. The price of this lease is $800 less than the first one.
It’s essential when looking at different offers to consider the mileage allowance. An auto lease that looks more affordable using the equation above can be more expensive in the long run if it has a lower mileage cap than the number of miles you drive.
Computing the Cost of a Purchase
If you are paying cash or get a zero-percent financing deal, the total cost of the car is simply whatever price you can negotiate.
It’s a little more complicated if you have a car loan, but using a tool called a car loan calculator does the hard work for you. When you enter the interest rate, loan term, and vehicle price into the tool, it will determine the monthly payment. Multiply that payment by the length of the loan (in months) and add your down payment plus the value of any trade-in to determine the total loan cost.
Here’s an example: Let’s say you’ve found the perfect midsize car for your lifestyle. You’ve negotiated a price of $30,000 for the vehicle, are making a $3,000 out-of-pocket down payment, and are trading in a car with a market value of $5,000. That leaves $22,000 to finance, and we’ll assume you qualify for a five-year, 5% loan. Plugging those numbers into our auto loan calculator, we’ll see that the monthly payments would be $415.
To find the total cost of this car, we’ll multiply $415 by 60, then add the $3,000 down payment and the $5,000 you received from your trade-in. The total works out to $32,900, including the $2,910 you’ll pay in interest on your car loan.
Can I Lease a Used Car?
Yes, you can lease a used car, though doing so is much less common than new car leasing. Used car leasing is a growing part of the market, but it’s still rare enough that you may find it hard to find a dealer willing to write a used car lease.
The used vehicles that are the most likely to be available to lease are certified used cars at franchised new car dealerships. Because vehicles depreciate at different rates as they age, their values get harder and harder to predict accurately. Leasing companies are likely to use the most conservative values they can when pricing a used car lease. That’s so they don’t risk as much money if the vehicle depreciates more rapidly than expected. That protects them, but it makes for a costlier lease for you.
Because the rate of depreciation tends to flatten out as vehicles get older, leasing a used car can be a spectacular deal. The price difference may be enough that you can lease a luxury car for the price of leasing a newer mainstream model. It is important to remember, however, that a used car will likely lack warranty coverage, so you’ll be responsible for potentially costly repairs.
There’s no one-size-fits-all answer to the question of whether you should buy or lease your next car. Leasing can be cheaper in the short term but is generally considered more expensive in the long run. Owning a car provides equity that can support future car purchases and doesn’t come with the restrictions or complexity of a lease.
Which option you choose depends on your current financial picture, automotive needs, and future plans.
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