Lease or Buy? That is the Question

You’re at a roadblock in your adult life: you can’t decide whether to purchase or lease a car.

It’s a familiar scenario these days. Leasing is on the rise—more than one in four consumers now lease their ride in the U.S. While it may be tempting to take advantage of new options such as shorter lease periods and low monthly payments, leasing isn’t for everyone. Studies indicate that leasing is more expensive than buying a car over a 10-year term.  But if you typically trade in your car every few years, must have the latest and greatest tech features and don’t accrue a ton of miles, leasing might be for you. The key is to know what you’re getting into. Here are some factors to consider.

Before we begin, let’s define our terms. Leasing is a little like renting a car. When the lease expires, you give the car back. If the car is in good condition and you have not violated the lease terms, you owe nothing (but you also own nothing, too). Typically, you must then choose to buy/lease another car or, in some cases, you have the option to buy the car at the lease-end-price.

Where it can get tricky is the terms you negotiate in your leasing contract. Remember that advertised lease rates do not include sales taxes and other fees. And changes to any of these four factors will affect your monthly payments:

  1. lease length
  2. number of miles
  3. drive-off fees
  4. interest payment

So consult a reputable dealer with whom you’re comfortable and start asking these important questions:

What is the lease term?

Don’t accept a lease term longer than 36 months. That way, your car will always be covered by its three-year bumper-to-bumper warranty.

What is the maximum mileage?

More importantly, what is the penalty if you exceed the number of miles included in the contract? Example: Typical leases allow 12,000 miles, with a penalty of 15 cents per mile after that.

Does your contract include gap insurance?

Gap insurance covers the difference between what your car is worth and what insurance companies will pay if your car is totaled.  (see New Car Replacement)

Does the lease require a very large down payment? (sometimes called a “cap reduction”)

Is the monthly payment too good to be true? Beware very low monthly payments, which typically require larger “drive-off fees” – the amount of money to begin the lease.

Once you’ve negotiated all the numbers, use this helpful calculator to get a better idea of your actual leasing costs.

When making a ‘lease or buy’ decision, you should consider not only financial comparisons but also your own personal priorities.   If having a new vehicle every two or three years with no major repair risks is important, leasing might make more sense. On the other hand, buying is usually more economical in the long run. It’s your ride. Make it work for you.

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