Drivers face big choices when getting a new vehicle, but deciding whether to buy their next car or lease it may be one with the most financial impact.
You'll likely have higher monthly payments if you buy a car and finance it with a loan, rather than leasing. The average auto loan payment for a new car is $568 per month, according to Experian's 2020 State of the Automotive Finance Market report. That's about $100 more expensive than the average lease payment for a new vehicle, which is at $467 a month.
By purchasing, though, you won't be tied down to mileage caps and other restrictions that come standard with a lease. And at the end of the loan, the car will be yours to keep.
"Once you get on the leasing merry-go-round, it's hard to get off," Jack Nerad, the author of "The Complete Idiot's Guide to Buying or Leasing a Car," told Grow last year. "When the lease is up, you just lease again. And again. You can end up making monthly car payments forever."
Choosing the best route for you will ultimately come down to your lifestyle, driving habits, and the way you handle money. To help you decide, here's what experts say about each option.
The percentage of drivers who opted to lease rose from 31% in 2019 to 52% in 2020, the J.D. Power 2020 U.S. End of Lease Satisfaction study shows. That signals that the financial uncertainty caused by the coronavirus pandemic has consumers more cautious about spending, experts say.
"I am relieved, relieved by the fact that I don't have to make a decision in this tumultuous environment," Brian Moody, executive editor at Autotrader, whose current car lease isn't up for another year, said recently.
Drivers who lease can put little or no money down upfront on a vehicle and choose a shorter loan period.
Leasing is more like renting a home. Drivers sign a contract that says they'll make payments for a set period of time, like 36 months, and when that's done, they have the option to buy out the car or move on to another lease with nothing to show for years of payments.
Many people choose the latter option since buying the car at its residual value can still be quite pricey after a lease term. A 2019 Honda Civic, for example, can cost $17,778 upfront. At the end of a 36-month lease, deals in several markets offer a purchase price of $11,718.
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Buyers may still be looking at a four- or five-year loan after their lease, and that's "an awfully expensive way to buy a car," says Nerad.
While it may seem less expensive on a monthly basis to lease, keep in mind that you likely won't get a low-cost deal if your credit score is short of 750. If you're still working on your credit like the many Americans who've gone into debt to cover costs this year, you could still land a lease, but can expect a higher down payment and additional interest costs.
A down payment may cost you more upfront when you buy a vehicle, and you'll have to deal with maintenance and costly repairs yourself once the warranty is up. But one of the perks of buying versus leasing is that you'll own the car once it's paid off and can put away any extra money toward another goal, like building an emergency fund or saving for a home.
The average car loan is about 72 months, according to Edmunds, but the sooner you can reasonably pay that off, the better. "The goal is to get a loan for as short a period as you can afford, and then plan to keep driving the car for at least five years after you have paid off the loan," David Haas, a certified financial planner in New Jersey, told Grow last year.
Another benefit of paying what you owe on time is that it can help boost your credit score.
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The decision to buy or lease a car isn't always an easy one. It makes sense to consider your personal finances and how much you can comfortably spend each month.
"If you are someone that keeps your cars a long period of time, then buying a car's the way to go. If you're someone who gets bored of your car every three to four years, then leasing is the way to go," Ronald Montoya, senior consumer advice editor at Edmunds, told Grow in February.
"And if you're just looking for the most financially sound option, as far as owning a car, it would be buying a used car, paying it off, and keeping it for a few years."
Auto websites like Edmunds and Kelley Blue Book can help crunch the numbers to figure out how many miles you spend on the road and the most cost-effective way to buy. Bankrate's Lease vs. Buy calculator can also help you determine the best financial move.
Whatever you decide on, it's important to plan for the long term. Treat a vehicle purchase the way you would any other financial goal, experts say: Let your budget be the driving factor.
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