Leasing vs. buying a car

Buying a car usually works one of two ways: Either you pay the full amount up front—like when you buy from a private seller—or you finance it and make monthly payments. Once the loan is paid off, the car is officially yours.

Leasing a car means you’re paying to use it for a limited time—you don’t own it. You make monthly payments, then return the car to the dealership at the end of the lease. The lease usually ends after a certain number of months or miles, whichever comes first.

Some lease contracts include a buyout option where you can choose to buy the car based on its value at the end of the lease. If you’re happy with the overall condition, mileage, and buyback amount of the vehicle, you may be able to finance the remaining cost. This is sometimes called a lease-to-own option.

Whether you’re financing or leasing, the application process is similar. A lender reviews your credit score and other factors, and determines the loan or lease amount you can qualify for. If approved, you’ll make monthly payments—usually from your bank account.

Some advantages of buying a car can include:

• Building value over time
  If you take out a loan to buy a car, you may build what’s called positive equity. This means the car could become worth more than what you still owe on your loan. In some cases, that equity can help you trade in the car or sell it and pay off the loan—possibly with money left over.

• Owning your car fully
  Once you’ve paid off your loan, you own the vehicle and receive the title from your lender. At that point, you’ll no longer have monthly car payments, which can free up money in your budget.

• More flexibility
  Unlike a lease, there are no mileage limits or fees for normal wear and tear. That means you can drive as much as you want without added costs.

Some disadvantages of buying a car can include:

• Down payment
  To get approved for a loan—especially with a better interest rate—you may need to make a down payment on the car. This is usually 10-20% of the sale price. Leasing typically doesn’t require a down payment, just upfront costs like taxes and fees.

• Depreciation
  Cars usually lose value over time. In fact, a new car can drop in value as soon as you drive it off the lot. On average, vehicles lose about $4,600 in value each year*, depending on the make, model, and condition.

• Sales tax
  Depending on your state, buying a car may mean paying sales tax on the full purchase price. When leasing, sales tax is usually applied to the upfront costs and monthly payments instead.

Some advantages of leasing a car can include:

• Access to newer vehicles
  Leasing can make it more affordable to drive a newer car with updated features. Monthly payments are often lower than buying, which may let you choose a vehicle that would otherwise be outside your budget. At the end of the lease, you can return the car and lease a newer model if you choose.

• Lower monthly payments
  Lease payments are usually lower than loan payments on the same car. That’s because you’re paying for the car’s expected loss in value (called depreciation) during the lease term, not the full cost of the vehicle.

• Limited repair costs
  Most leased vehicles are covered under the manufacturer’s warranty, which can help with unexpected repairs during the lease term. You’re still responsible for general vehicle maintenance like oil changes and tire rotation.

Some disadvantages of leasing a car can include:

• Mileage limits
  Most lease agreements set the number of miles you can drive during the lease term. If you go over that limit, you’ll likely have to pay extra—usually between 10 and 25 cents per mile.

• No customizations
  Leased vehicles generally can’t be customized. You may be limited to only temporary or approved modifications outlined in your lease agreement.

• Early termination fees
  If you need to end your lease early, you may be charged a penalty. This could equal several months of lease payments, depending on the terms of your contract.

If you’re having trouble deciding whether to lease or buy a car, ask yourself these questions:

• How much do you drive? Do you have a long commute? Do you like to take road trips or frequently visit out-of-state family? Or is most of your driving local?

• How does the payment fit into your budget? Do you have the cash flow to take on higher payments? Or does your current financial situation mean you need to prioritize a lower monthly payment?

• How long will you use it? Are you investing in a vehicle that will fit your lifestyle for many years to come? Or are you looking to try something new, temporarily have a larger vehicle, or change vehicles every few years?

• Do you like to customize your vehicle? Many lease agreements restrict your ability to modify the vehicle. So, if you enjoy making modifications to your vehicle—like upgrading the sound system or giving it a unique look with decals, rims, and after-market add-ons—you may be better off buying.

Still deciding? Try using a lease vs. buy calculator—like this one from Bankrate—to compare monthly payments and overall costs. Just enter a few details to see how the numbers stack up.

Whether you decide to lease or buy a car, you’ll need insurance to cover it. Insurance prices are not automatically higher or lower when you lease or buy a vehicle. When you’re budgeting for car insurance, keep in mind:

• Leased vehicles may require more coverage
  Leasing companies often require higher levels of insurance—including collision, comprehensive, and sometimes gap insurance—to protect the vehicle during the lease term.

• Purchased vehicles offer more flexibility
  If you buy a car, your insurance requirements are usually based on your lender’s rules—if you have a loan—or your state’s minimums. This could give you more flexibility in the types and amounts of coverage you carry.

• Coverage costs vary based on the car
  Newer or higher-value vehicles often have higher replacement costs, which can lead to higher premiums—whether you lease or buy.

Dairyland^®, a brand of the Sentry Insurance Group, offers flexible auto insurance options to help you stay covered—whether you're leasing your first vehicle or financing a used car. For more than 70 years, we’ve offered competitive rates and the best quality auto insurance.

Ready to insure your vehicle? Find a Dairyland agent near you.