Should I Lease or Buy a Car?

Whether to lease or buy a car ultimately comes down to your personal needs and preferences. If you need lower monthly car payments or like to drive newer car models, leasing a car might appeal to you more. On the other hand, if you drive many miles or want to eventually have no car payment, buying a car could be your better option.

Leasing and auto loans provide two very different ways of paying for a car, and those differences can determine whether one or the other is a better choice for you.

• When you lease a car, you pay monthly to drive it for a predetermined amount of time and miles. When the lease ends, typically you return the car to the leasing company. 

• When you use a traditional loan to buy a car, your monthly car payment goes toward principal and interest on the loan. Once the loan is paid off, you own the car. 

• When you lease a car you’re paying for how much the car depreciates during the time you drive it. 

• When you get an auto loan, you’re paying to build equity and eventually own, sell or trade-in the vehicle. 

These questions can help you decide whether leasing a car versus buying is better for you.

Do you make short commutes around town, or do you regularly take long trips? Leasing places a limit on the number of miles you can drive before having to pay per mile. Lease agreements can range from an allowance of 10,000 miles a year to 15,000 miles. For a typical three-year lease, that’s anywhere from 30,000 to 45,000 miles.

If you drive farther than your allowed miles, the penalty for each additional mile can be from 12 to 30 cents at the end of the lease. So, if you’ve gone over your mileage limit by 2,000 miles and are paying 30 cents a mile, you would owe $600. Buying extra miles upfront is an option, but in most cases, high-mileage drivers are better off purchasing a car than leasing it.

If you regularly have poles jumping in front of you or kids dumping ketchup on the seats, you might rethink leasing. That’s because when you turn the car in, it will be inspected for damage beyond normal wear and tear (as determined by the inspector). Significant upholstery damage, large dents, cracked windshields and extremely worn tires can be considered excessive. If so, you might pay hefty fees for repairs.

Of course, you could have the same damage when driving a car that you finance, but you decide what you want to repair, when and at what cost.

The average lease payment for a new car is $581, compared to the average monthly loan payment for a new car at $737, according to Experian’s State of the Automotive Finance Market report for the third quarter of 2024^[0]

Indeed, leasing can be less expensive than a new-vehicle loan in the short term due to lower monthly payments. That’s because your payment is based only on the car’s depreciation during the lease term (plus taxes and finance charges), whereas a car loan payment is based on the full value of the vehicle.

But over the years, if you’re perpetually leasing, you can end up paying more than if you bought a car with a loan. If you’re always leasing a newer car, you’re never getting past paying the steep depreciation that clobbers a car’s value in the first year. Also, there’s never an opportunity to build equity in a car.

» MORE: Calculate a monthly car lease payment

If you continuously lease, you’ll always have monthly payments. Conversely, if you buy a car, you may have to make higher monthly payments for several years, then the payments end when the loan is paid off. That means you can continue to drive the car with no payments and the vehicle will be yours to own.

• Paying off and owning a vehicle can be an advantage if you’re trying to save up for another big purchase, such as a home, or if you want to trade the vehicle in for a new one. Also, if you face financial hardship, you may be able to sell your car for extra cash. 

• It’s also possible to buy a leased car. Leasing companies estimate what a car will be worth when a lease ends, which is called the residual value. You can choose to pay the residual amount and keep the car, and lease buyout loans are available. But, it may not make sense to keep a leased car if its actual value ends up being below the residual value.

When financing with an auto loan, it’s best to make a down payment on the car. NerdWallet recommends putting down 20% of a new car’s purchase price and 10% for used cars, if possible. This means if you’re buying a new car worth $35,000, you would make a down payment of $7,000. Of course, you could opt out of making a down payment, but you will have higher monthly payments and pay more in loan interest overall. Also, a lender may require money down if a borrower has had credit problems.

If you can’t or prefer not to make a large down payment, leasing a car might be a better option. Again, if you have bad credit, it’s possible that you will be required to put some money down. But if you have good credit, you can typically start a lease with $0 down and still have lower payments than if you bought the car. Some auto experts even advise against making a down payment on a lease if you don’t have to. That’s because you’re not likely to get your down payment back if the leased vehicle is stolen or totaled in an accident.

A commonly cited advantage of leasing is that it maximizes cash flow. Another way of thinking of it is a “pay as you go” form of car ownership. So, rather than dumping a lump sum into a large down payment and making high monthly payments on a loan — you can lease and direct the money you save elsewhere.

Car dealers and manufacturers offer a variety of auto deals and incentives for buying and leasing.

Most auto manufacturer websites enable you to search for cash rebates, low-rate financing and lease deals in your area by using your zip code. If you’re trying to decide between leasing and buying a car, comparing the available offers is a good idea. Just be aware that sometimes leasing specials with very low monthly payments are based on an inflated residual value for the car. That may not be a problem if you turn the car back in, but it could be an issue if you think you might want to buy the car when the lease ends.

If you’re thinking of buying or leasing an electric vehicle or a plug-in hybrid, consider the federal electric vehicle tax credit of up to $7,500for the purchase of certain new electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs)s. However, both the buyer and vehicle must meet numerous conditions, and many EVs don’t qualify.

When you lease a car, these restrictions don’t apply. The transaction is considered a commercial sale for the leasing company, and they receive the tax credit. In most cases, all or some of the credit is passed on to the lessee. So, you might be able to take advantage of tax credit savings for a leased vehicle that aren’t available when you buy the same make and model.

» MORE: Find the best auto lenders and rates

For some people, driving newer cars is important. Leasing offers the ability to have the latest design and cutting-edge technology that you might not otherwise be able to afford with a car loan.

However, there are some constraints. If you break your car lease early, for example, you may be on the hook for termination fees that can cost up to the total amount left on the lease.

Conversely, buyers can sell or trade-in their cars without being charged a fee, and they can use the sale amount to cover any remaining loan balance or to purchase another car.

Deciding whether to lease or buy a car comes down to your specific priorities and needs in a vehicle. Car leasing continues to grow in popularity, with nearly 24% of new vehicles being leased in the third quarter of 2024 according to Experian. But leasing isn’t the right option for everyone, especially if you expect to drive a lot of miles.

On the other hand, if you drive short distances and think you won’t want to keep a car — for example if you just want to try out driving an EV before buying one — leasing could be a better choice than purchasing. Thinking through what’s important to you when driving and paying for a car can help you determine whether buying or leasing is a better fit.