Is It Better To Buy Or Lease a Car?

two women sitting on couch with ipad deciding to buy or lease a car

When you're in the market for a new car, whether it’s your first or your next, you’ll see tons of ads promising super-low monthly payments that may sound too good to be true.

Leasing a vehicle might sound more budget-friendly when compared to traditional auto financing, but a smart buyer always considers more than just the monthly payments. Make sure you consider ongoing expenses, including maintenance, insurance, fuel, and repairs, and factor these into your decision.

That’s why it’s important to weigh the pros and cons of leasing versus traditional financing before taking your next test drive.

The Pros and Cons of Leasing a Car

Key benefits of leasing a car:

  • Lower monthly payments. Unlike traditional auto financing, you're not paying down the principal balance of a loan. A lease payment typically includes the amount the vehicle is expected to depreciate during the leasing period, along with a monthly sales tax and finance charge. Depreciation is calculated using the annual rate at which the car loses value.
  • Low or no down payments. For the same reasons you can expect to make lower monthly payments, you may be able to secure a new lease with little or no money down.
  • You might be able to afford a higher-priced car even if you're working with a tight budget. A new-model leased vehicle that includes numerous upgrades could be within financial reach since the costs for getting into a lease are often lower than traditional auto financing.
  • Used-car leases are a thing. Most consumers are unaware that you can lease a used car if it meets certain requirements. Often referred to as certified pre-owned (CPO) vehicles, they are typically less than four years old and have low odometer mileage. A used-car lease can offer significant savings over new.
  • Short-term leasing periods. With leasing periods of less than three years, you can often avoid the mechanical issues you might experience with older-model vehicles. Even if you have car troubles, they're likely covered under the manufacturer's warranty.
  • Leasing perks, such as complimentary car washes and scheduled maintenance, might be part of your agreement.
  • Multiple end-of-lease options. At the end of the lease, you can either purchase the vehicle by paying the balance in one lump sum, return the vehicle to the dealer, or transition to another lease.


Considerations of leasing a car:

Despite the upsides of auto leasing, there are a few things to consider that may have a negative impact depending on your end goal. Remember the following points as you compare your financing options:

  • You don't own the car. A lease is similar to renting a vehicle. The title is in the dealer's name, not yours. Monthly payments do not help build equity, and you cannot customize the vehicle in any way.
  • Perpetual leasing cycles could result in seemingly never-ending car payments. If you transition into another lease, you may end up paying more for the leased vehicles without the benefit of car ownership. These funds could otherwise be used to reach your other financial goals.
  • Mileage limitations keep you off the road. You'll have to be mindful of how much you drive due to mileage limits. A typical lease agreement requires the lessee to pay a mileage penalty for exceeding 12,000 miles a year.
  • A few thousand miles over the annual limit could be costly. Some agreements charge as much as 50 cents for each additional mile. And, you don't get credit for unused miles. High-mileage leases might allow you more freedom but are more expensive than a standard lease.
  • Over-mileage fees aren't the only surprise costs you could face at the end of the lease. If the car does not meet return condition requirements, you may have to pay excessive wear-and-tear charges.
  • Early termination fees. Ending a lease early means you'll typically pay a hefty penalty. Some agreements will allow you to cancel the contract early only if you are purchasing the vehicle.


The other options is to buy the car, although typically this is done with an auto loan as most buyers don't have the cash on hand to buy a new car outright.

Pros and Cons of Buying a Car

Benefits of buying - getting a loan for a car

  1. It's your own car so you can change anything you want with it. There’s no contract to stop you!
  2. You can sell it at any time you want for any reason. You're not tied down with a contract that says you have to own the car for a minimum number of months/years.
  3. There's no limitation on the number of miles you can put on it. You can use your car as often as you wish and take it wherever you want without worrying about mileage.
  4. If you don't care about having to drive the latest model all the time, you'll save more money paying toward your own car than toward different leased cars.

Considerations to Know Before Buying a Car

  1. You may need to have a large down payment or high value trade-in to keep your monthly payments lower, especially for the newer and high-end models. Also, the monthly amortization for a car loan is typically bigger than a lease fee.
  2. Instead of investing your hard-earned money, you're putting it toward an asset that doesn't earn for you. Unlike real estate, stocks, and other kinds of potential earning investments, automobiles depreciate in value over time.
  3. You have to take care of the repairs and other maintenance needs of your car. When your warranty expires, the expenses will come out of your pocket.
  4. Once you decide to sell or trade in the car, you have to do the whole process yourself, unless you're willing to pay someone else to take on this task.

Depending on your situation, leasing a car might be a much more attractive option than outright buying one. However, there are a lot of terms and fees involved with a car lease, many of which can be negotiated. Let’s take a look at what sorts of terms and fees you can expect to see in a car lease contract.


First, Learn How to Decipher The Car Lease Contract

Once you’ve chosen the car and worked with a salesperson, you’ll have lots of paperwork to read over and sign. Make a promise to yourself not to sign anything until you understand and agree to everything in it.

Chances are, there will be some items mentioned that you’re unfamiliar with. Since many of us are too afraid to ask, here’s a handy guide to many of the terms you’re likely to encounter on your lease agreement:

  •  Acquisition Fee — also called a bank fee. It’s usually between $500 and $1000 and it’s set by the lease finance company. Dealers sometimes increase this fee to get a little profit for themselves. Non-negotiable.
  • Destination Fees — the cost to have your car delivered to the dealership - usually $400 to $800. However, keep your eyes peeled for charges, such as “pre-delivery inspection fee,” “delivery fee,” or “dealer prep.” Dealers will sometimes try to sneak these additional fees past you. Non-negotiable.
  • Disposition Fees — what you may need to pay if you don’t lease another car from the dealer when your current lease ends. These are typically about $350.
  • Documentation Fee or Doc Fee — an administrative fee that commonly runs $250 to $600, most of which is profit for the dealer. Negotiable.
  • Mileage Fee — the per-mile charge at the end of your lease for excessive miles driven during the lease. Fees range from $0.15 to $0.25 per mile. Non-negotiable.
  • Net Capitalized Cost — this is the negotiated price of the car plus the acquisition fee.
  • Purchase Option Fees — the amount you’ll have to pay if you decide to purchase the car at the end of the lease. These can be negotiable, but usually at the end of the lease when you can ask to have these fees waived.
  • Residual Value — what the car is expected to be worth at the end of the lease. This is used to determine the cost of your lease.
  • Sales Tax — sales tax will be charged on any down payment you make, depending on the state where the vehicle is leased.
  • Tag, Title, License, and Registration Fees — charged by state and local governments. Non-negotiable.
  • Tire Fee — a government-mandated fee. Non-negotiable.

If you have questions about these or any other terms in your lease contract, don’t be afraid to ask! Leasing a car is a big deal—both financially and legally—so be sure you understand what you’re signing. Many of these fees are non-negotiable, but there are several that can be negotiated for lower prices if you know how to go about it.

Tips For Negotiating A Car Lease In Six Easy Steps

Meet Tom. He lives in Boston and rides the T to work. He can walk or ride his bike almost anywhere else he needs to go. He’s just been offered a great job opportunity — a two-year placement outside the city — and he’s going to need a car. Since it’s temporary, leasing a car makes the most financial sense. But Tom has never leased a car before so he’s a little unsure how to approach it.

No problem! We’ve got some great tips on how best to negotiate a lease, starting with figuring out what you can afford.

  1. Begin by taking a good look at your budget to determine what you can afford to pay monthly. Don’t forget to include the cost of insurance. (Most insurance carriers can give you a basic list of cars and their approximate cost to insure.) Plan to spend no more than 20% of your take-home pay on all your car-related expenses.
  2. Pick a couple of dealerships to visit and choose the model, color, and options you want on two or three cars in your price range. You can also check out the inventory at local dealerships through AutoSMART. Be on the lookout for models with good safety features and low insurance premiums. Only consider cars you can take for a test drive. Don’t tell the salesperson you’re interested in leasing.
  3. Get additional bargaining information by learning what others have paid. Consumer Reports has a Build & Buy Car Buying Service® that will give you an idea of what others in your neighborhood were willing to spend for the makes and models you're considering. The report will also give you an idea of how much room you have to negotiate.
  4. Return to the dealership and negotiate the purchase price of the vehicle. The salesperson may try to negotiate the monthly payment you want but stick to the total price of the car. Only after this negotiation is completed should you tell the dealer you’d like to lease the car. Your monthly payments will be based on the final price you agree to.
  5. Ask the dealer to put all the costs and fees associated with leasing the car in writing so you can go over them to make sure they’re fair. Feel free to ask the dealer to explain what each fee covers. Take a close look at the figure for the Capitalized Cost Reduction. It should be zero if you aren’t putting any money down.
  6. If you’re not happy or comfortable with the deal you’re being offered, WALK AWAY! In fact, plan to leave and return in a day or two; it may give you a little more bargaining power. Don’t be in a hurry to sign the contract, because you’re more likely to agree to a deal that, well, may not be ideal.

Following these steps should help you negotiate a good deal on a lease. Just remember to be patient, detail-oriented, and firm.

Once you’ve signed on the dotted line, be sure to make your payments on time, watch your mileage, and, most of all, enjoy your new car!


Car Loan vs. Leasing: Want the Best of Both Worlds?

Additionally, there's a way to take advantage of the benefits of both leasing and buying a car. Our Better Than a Lease product is a car lease-like program you can use to get yourself in a new or used car, truck, or SUV.

Unlike a lease, the title to the car is in your name, not the dealer's, and you'll have the option to sell, trade, or refinance anytime, or return the vehicle at loan maturity. If you're the kind of driver who likes to change vehicles every couple of years, our Better Than a Lease product offers shorter loan terms than you'll find with regular leases. You also avoid paying a security deposit or acquisition fees, and there's no early payoff penalty. Learn more here.

Deciding between financing options can be tricky. Slow down and explore your purchasing options before you grab the keys to your new car.


Some Common Questions About Car Leases...

If you're thinking about leasing a car, you likely have questions. Here are some of the most frequently asked questions people ask when they're considering a lease over financing:

Q: I have a car picked out but I don’t know if it’s cheaper to buy or lease it. How can I tell?

A: We have an online calculator that can help you figure that out! Just enter common assumptions like down payments and rebate amounts, along with the leasing and purchase information you have, and the calculator will figure out your overall costs for both leasing and buying.

Q:  How do they figure out my monthly payment on a lease?

A:  Let’s say you’re leasing a $30,000 car, the price you’ve agreed to with the dealer. The dealer determines what the car will be worth three years later when you turn it in. This is called the car’s residual value. Let’s say it’s 55% or $16,500. Subtract that from $30,000 and you get $13,500. That’s what you’ll make your lease payments on, plus interest, taxes, and fees.

Q: How do I buy the car at the end of my lease?

A: If you like the car and want to keep it, you’ll have to negotiate with the dealer for a good price. You can check out sites AutoSmart, Edmunds, or Kelley Blue Book for a fair price. It’s often in the dealer’s best interests to sell it to you because then they don’t have to take it to an auction and sell it.

Q: How can I avoid a lot of fees when I turn in my leased car?

A: Here are a few tips:

  •    Have the car washed, detailed, and serviced right before you turn it in
  •    Make sure you keep up with required service and save the records
  •    Fix minor damage that is covered under your insurance policy
  •    Stay within your mileage limit

Q: What if I go way over my mileage allowance?

A: If you don’t want to pay all the fees you’ll owe, you can sell the car yourself.

Q: Do I have to have my car serviced at the dealer where I leased the car?

A: Absolutely not, although they'd love it if you did! Go to a dealership that’s convenient and works with your schedule.

Q: Can someone else drive my leased car?

A: Most lease contracts specify who is allowed to drive a leased car. Typically, that includes a spouse or immediate family. Lease companies usually require a request for permission for drivers outside your immediate family. To be on the safe side, carefully read your contract or contact your lease company.

Q: Can I use my current car as a trade-in on a lease?

A: If it’s paid for, yes. Check on its fair trade-in value and make sure the dealer gives you full credit when your lease payments are calculated.

If you still owe money on your car, you need to get the “payoff” amount from your finance company and compare that amount to the car’s trade-in value. If the trade-in value is higher, you have “trade equity.” If not, you’re upside down and you may want to reconsider.

Q: Can I buy extra miles with my lease?

A: Most leasing companies will allow you to buy extra miles up front — often at a less expensive rate — and include the cost in your monthly payments. For example, say you know you’ll drive 20,000 miles over the limit in a 24-month lease. If the buy rate is 12 cents per mile, you’ll spend 20,000 x $.12 = $2400. Spread over the 24-month lease, this means you’ll pay $100 extra per month, but you’ll avoid a $2400 (or more) bill at the lease-end. Most companies will even refund you any unused purchased miles at lease-end.

Q:  How do I get out of my lease before my contract expires?

A:  Ask your leasing company if they allow lease assumptions. If they do, you can look for someone with good credit to take over your lease. If you can’t find someone on your own, you can use an online service such as or Or you can try to sell the car on your own.

Q: What if I just walk into the dealership, hand them the keys to the car and stop making my payments?

A: Technically you can do this, but it will go on your credit report as a repossession or "repo," which will damage your credit score and affect your future ability to borrow money.


auto financing eGuide

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Hanscom Federal Credit Union
Hanscom Federal Credit Union

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