Buy or Lease? Which Should You Do?
Recent Auto Loan Rates
We publish an auto lender review guide to help buyers see current rates from top nationwide lenders.
For your convenience, here is data on what rates looked like across Q1 of 2023 after the Federal Reserve likely completed most of the current hiking cycle.
| Borrower | Credit Score | New | Used |
|---|---|---|---|
| Super Prime | 781 - 850 | 5.18% | 6.79% |
| Prime | 661 - 780 | 6.40% | 8.75% |
| Nonprime | 601 - 660 | 8.86% | 13.28% |
| Subprime | 501 - 600 | 11.53% | 18.55% |
| Deep Subprime | 300 - 500 | 14.08% | 21.32% |
Source: Experian 2023 Q1 data
Here were what rates looked like in Q2 of 2022.
| Borrower | Credit Score | New | Used |
|---|---|---|---|
| Super Prime | 781 - 850 | 2.96% | 3.68% |
| Prime | 661 - 780 | 4.03% | 5.53% |
| Nonprime | 601 - 660 | 6.57% | 10.33% |
| Subprime | 501 - 600 | 9.75% | 16.85% |
| Deep Subprime | 300 - 500 | 12.84% | 20.43% |
Source: Experian 2022 Q2 data, published in August of 2022
For historical comparison, here is what the data looked like in Q1 of 2020 as the COVID-19 crisis spread across the United States.
| Borrower | Credit Score | New | Used |
|---|---|---|---|
| Super Prime | 720 or higher | 3.65% | 4.29% |
| Prime | 660 - 719 | 4.68% | 6.04% |
| Nonprime | 620 - 659 | 7.65% | 11.26% |
| Subprime | 580 - 619 | 11.92% | 17.74% |
| Deep Subprime | 579 or lower | 14.39% | 20.45% |
Source: Experian 2020 Q1 data, published on August 16, 2020
Across the industry, on average automotive dealers make more money selling loans at inflated rates than they make from selling cars. Before you sign a loan agreement with a dealership you should contact a community credit union or bank and see how they compare. You can often save thousands of dollars by getting a quote from a trusted financial institution instead of going with the hard sell financing you will get at an auto dealership.
If our site helped you save time or money, please get your accessories like cell phone chargers, mounts, radar detectors and other such goodies from Amazon.com through our affiliate link to help support our site. Thank you!
A Primer On Leasing vs Buying
There are drivers that would never consider leasing a car. Conversely, there are drivers that would never consider buying a car. Someone who has only ever leased a vehicle may wonder whether or not they're getting the most value in their choice. People who only ever buy a vehicle may also wonder if there's better value in a lease. Any driver in the market for a new vehicle should consider both options prior to making their final decision.
What is a lease?
A lease is a contract between the person/company that owns a product and a person that wants to use that product without making a purchase. The contract is usually negotiable in terms of length. The owner of the vehicle has complete control over the terms of the contract, can limit how the vehicle is used and can prevent any changes from being made to the vehicle.
What is a purchase?
As the name suggests, a purchase occurs when the owner of a product agrees to give up complete possession of said product for a certain price. Once an agreement is made and money exchanges hands the previous owner has no rights to the property and no say in how the vehicle will used.
The Advantages of Leasing a Vehicle
- More car for the money
- Less upfront money
- More flexibility
- Get a new car more often
- Reduced maintenance issues
- Full coverage in case of an accident
- Option to buy
- Never upside down on a loan
More Car for the Money
Perhaps one of the main reasons that people choose to lease a vehicle is because they can get more car for the money that they have to spend. The reason for this is that a lease allows for much lower monthly payments on a vehicle.
If someone has $350 to spend on their monthly payments each month, if they were to purchase a vehicle they may be able to afford a car that costs around $18,000. If, however, the same person chooses to lease a vehicle they could potentially lease a vehicle that's worth $36,000 for that same $350 a month.
Less Upfront Money
While this isn't the case for every lease, those interested in leasing will find that in many cases there is no down payment requirement when a vehicle is leased. Often, the exception to this is when a dealer is offering an exceptional deal on the lease in order to move the vehicle. In these cases, they will require a down payment to help offset some of their upfront costs.
Buyers can also save money on reduced taxes when leasing a car. When someone purchases a new car, they are required to pay the taxes for the entire value of the vehicle. When a lease is made, the taxes are only applied to the value of the lease rather than the value of the car.
More Flexibility
The flexibility in leasing is that if someone does prefer to make a down payment, they can do so in order to reduce their monthly obligation.
Get a New Car More Often
Another appealing aspect of leasing a vehicle is that drivers are able to get a new car more often. A lease can range anywhere from one year to three years – or even longer depending upon the terms of the lease – which means getting a new vehicle is more plausible more frequently. With the right kind of lease, drivers can leave one lease and automatically enter into a new lease agreement.
Reduced Maintenance Issues
Often, a lease has one of two options. In some cases, all regular maintenance is included as part of the lease. This can also include any mechanical issues, to include wear items. More often, however, the vehicle being leased includes a warranty. Many people choose to lease a car – or a truck – for the length of time the warranty covers the vehicle to ensure that all maintenance issues are covered at a reduced cost or free of charge.
Full Coverage in Case of an Accident
When an accident occurs, in most cases lessees will discover that the entire value of the lease contract is provided for. This is similar to gap insurance; however, the coverage comes from the seller rather than the insurance company.
Never Upside Down on a Loan
Leasing a vehicle means that the lessee is never going to have to worry about owing more on the car than it's worth. As the lessee is able to walk away from the vehicle at the end of the lease, there is never a concern about the cost differentiation.
Option to Buy
At the end of the lease, lessees have the option to purchase the vehicle that they have been leasing, if they choose the open-end lease. This is done via a balloon payment, although most of drivers get a new loan through their bank to pay for the balance on the vehicle.
The Advantages of Buying a Vehicle
- Make the car personal
- Instant collateral
- Eliminate car payments
- Drive all you want
Make the Car Personal
One major advantage of buying vehicles is that car owners can modify their vehicle in whatever way they want. They can upgrade the stereo, put in new speakers, reupholster the interior, add ground effects, change the hood ornament, change the car color and more.
Instant Collateral
Something that many people don't consider when thinking of their vehicle is the value it offers in terms of collateral. Whether someone needs a loan for their business, home improvements, to pay bills or for any other reason, owning a vehicle can actually increase a person's ability to get a loan.
Eliminate Car Payments
An investment in a reliable vehicle could eventually lead to no car payments due to ownership. While this may mean not having a new car every couple of years, many people find that a reliable vehicle can last them 15 to even 20 years as long as they provide regular maintenance and upkeep.
Drive All You Want
Car ownership means that the car owner can drive as much as he or she wants, whenever and wherever he or she wants. There are no restrictions on mileage, or restrictions on distance traveling.
The Disadvantages of Leasing a Vehicle
- Always have a car payment
- Potential for mileage fees
- Higher insurance fees
- Potential for wear and tear fees
- High fees for early return
- Never own the vehicle
Always Have a Car Payment
When someone chooses to lease, unless they choose the buyout option at the end of the lease, they will always have a car payment to make.
Potentially Large Balloon Payment
Is a lessee chooses to purchase the car at the end of the lease, the balloon payment can be incredibly high. Although the driver has been making payments for the last 2 to 3 years, that money is not enough to cover the cost of the car. Often, the balloon payments is more than what the driver would pay for the vehicle had they borrowed money to purchase it from the beginning.
Potential for Mileage Fees
Every car lease includes a restriction of how many miles the vehicle can be driven. In some cases, this number can be as low as 12,000 miles a year. If a driver exceeds the acceptable mileage then he or she will pay a per mile fee. This fee can be as much as $.50 per mile over the mileage limit, although for a high-end car $.20-$.25 is usually the norm. For a more economical car, the rate can be about $.15 for every mile over the limit.
What this means is that if a driver has an agreement where they will not exceed 12,000 miles a year and they exceed that limit by 3000 miles while driving a luxury vehicle, then at the end of the lease the cost will be $750. For people who lease the car in an effort to save money on their monthly payments, this could prove to be an excessive amount of money.
Higher Insurance Fees
Often, insurance companies will charge more to insure a leased vehicle then they will for a vehicle that someone is purchasing. The reason for this is actually quite simple. A lessee is fully responsible for any damages incurred in a car accident. Unlike when the vehicle is owned, a person who leases a vehicle does not have the option of forgoing repairs. As such, the lessee must carry very high coverage in order to satisfy the leasing company.
Potential for Wear and Tear Fees
If a driver turns in a vehicle that has any interior or exterior damage, the lessee is financially responsible for said damage. Wear and tear responsibility can vary from dealer to dealer, and it's very important that lessees understand their responsibility when it comes to the interior and the exterior of the vehicle that they are leasing.
High Fees for Early Return
If something happens financially and the lessee finds that they have to return their vehicle prior to the end of the lease, they could face some steep fees. There is no repossession options, most contracts include very high early return fees.
Never Own a Vehicle
This won't be a disadvantage for every driver, but for some people the prospect of never owning their own vehicle is a disadvantage. When the lease is over, if the driver chooses to, he or she can simply walk away from the vehicle with no other obligation other than the potential fees listed above, if they choose a closed-ended lease.
Disadvantages of Buying a Vehicle
- Maintenance costs
- No gap coverage
- Higher tax costs
- Higher monthly payment
- Down payment requirements
- Car ownership equals depreciation
Maintenance Costs
One major disadvantage to buying a vehicle is the owner is completely responsible for all maintenance costs for the vehicle. If the vehicle was purchased new, there will typically be a warranty that offers a decent amount of protection. Often, however, that warranty will not last as long as the loan on the vehicle. Also, in many cases, just as the warranty ends many of the high cost items are in need of repair.
No Gap Coverage
Gap insurance is automatically part of a leased vehicle. For a purchase vehicle, however, this isn't the case. What's more, in many states insurance companies don't offer gap insurance, which means the owner of the vehicle will be responsible for paying off their vehicle even if it's totaled in a car accident.
Higher Tax Costs
When someone purchases a vehicle, at the beginning of the purchase, whether it's purchased in full or a loan is procured, the taxes for the entire value of the vehicle are due. Some lenders will allow this amount to be rolled into the loan, while others will require you to pay up front.
Higher Monthly Payment
For many people, the major disadvantage to buying is the higher monthly payment. The monthly payment is based on the entire value of the car, which is not the case when a lease is procured.
Down Payment Requirements
Almost 100% of the time a down payment is required in order to get a loan for a new or used car purchase. While this wasn't always the case prior to 2009, with the credit crunch, most lenders now require at least $1000 down before they will provide a loan.
Car Ownership Equals Depreciation
When someone chooses to purchase a car, he or she is also paying for the depreciation in value. The bottom line is that the vehicle will not hold its value, and the owner will never be able to sell the car for what they paid for it, even if they were to pay for the vehicle without getting a loan.
Who should lease a car?
The decision to lease will depend on the specific situation of the driver. Someone who doesn't have a lot of money available for a large monthly payment may find that leasing is the best alternative. This is also the case for someone who doesn't have a down payment available for a purchase
There are those individuals who need to drive a nice car for business purposes. Often, this is the case for lawyers, designers, real estate agents, entertainment agents and other similar fields. Because people will judge people in certain careers by the way they dress and the vehicle they drive, leasing a vehicle makes perfect sense as these individuals, no matter how successful they are, can look incredibly successful by leasing a luxury car at a price that's more in line with an economical car.
Business owners should also consider leasing vehicles. In many states, there are great tax deductions for leasing that aren't available for car purchases. Of course, such a business owner should look at their tax obligation and breaks for both purchasing and leasing a vehicle.
Who should buy a car?
Much like leasing a vehicle the decision to make a purchase depends on a driver's particular situation. If, however, a buyer should someone who wants to own their own vehicle, doesn't care about having a brand-new vehicle every couple of years and doesn't want to always have a car payment.
What is the best car to lease?
Drivers will find that dealers offer some great deals for new leases. This can lead to some confusion as to what kind of car is best to lease. The truth is that there is not one consensus regarding the best car to lease. There are, however, things that you can do to ensure that you get the best lease possible.
- Lease a vehicle with low depreciation – While depreciation isn't as big of an issue for a leased vehicle as it is for one that is purchased, the deal a driver can get for their leased vehicle is based a lot on the depreciation of the vehicle. A vehicle that depreciates quickly is usually more expensive to lease than a vehicle that does not depreciate quickly. The reason for this is that a dealer can get a higher price for the resale of the vehicle at the end of the lease if the car or truck has a lower depreciation rate.
- Lease a vehicle from a reputable dealer – Taking the time to research various dealers and their lease deals is important. Just like any type of business, drivers will find that there are good dealers to do business with and bad dealers to do business with. Some dealers will write lease contracts that are full of vague terminology and undefined stipulations that can end up costing the lessee a lot of money at the end of the lease.
- Understand the contract – In addition to using a reputable dealer, it's important for a driver to understand what the legal terminology within the lease means. For example, excessive wear and tear needs to be specifically defined so that the lessee isn't surprised with a huge fee at the end of the lease.
What is the best car to buy?
As with leasing a vehicle, drivers will find that there is no one source for choosing the very best car or truck to purchase in the United States. Part of the reason for this is that the best car for buyer number one, someone who needs an economy vehicle to get them to and from work, will not be the best car for buyer number two who needs to use their car to transport colleagues and clients from one place to another. There are some things that a car buyer should look for when making their new or used car purchase, however.
- Depreciation levels – While with a lease a low depreciation is somewhat important, when someone is buying a vehicle a lower depreciation is very important. Depreciation is the loss of value of a vehicle once it has been purchased. The lower the depreciation rate the better the value on the vehicle should the owner wants to sell later. In addition, a lower depreciation rate means the vehicle has a higher value should an accident occur that totals the vehicle. Examples of cars that have low depreciation rates include:
- Audi A3
- BMW 1-Series
- BMW 5–Series
- Fiat 500
- Ford Fiesta
- Ford Focus
- Ford Ka
- Mazda 6
- Mercedes C Class
- Vauxhall Corsa
- Shop around for lenders – When you visit a dealership, they will have a variety of lenders from which to choose. In some cases, however, buyers will find that these lenders aren't necessarily those that will offer the best interest rates. It's important for buyers to visit their own bank for a loan in addition to comparing the rates between the lenders that work with a dealership.
- Find specials – Buying a car is a major purchase. As such, buyers should take the time to compare the price of a car between various car dealerships. What's more, buyers should check online, check local newspapers and watch car commercials for dealerships that are offering great deals on a new car purchase.
- Choose a reputable dealer – Both lessees and buyers alike will benefit from choosing a dealer with an excellent reputation in their area.
- Consider operation costs – It doesn't matter how good of a deal a vehicle might be, if a buyer can't afford the costs of operation, then the vehicle is not the right choice. Operation costs include:
- Cost of insurance
- Cost of parts
- Cost for tires
- Fuel costs
- Regular maintenance costs
- Car reliability – When someone decides to purchase a vehicle it's important to consider the reliability of the vehicle. The car or truck will hopefully last for many years, and should be one that experiences the least amount of mechanical failures possible.
There are no set rules when it comes to buying or leasing a vehicle. The choice to do either one of these things belongs solely with the person searching for a new car. There are clearly benefits and downsides to both of these options to consider. The best thing that anyone in the market for new car could do is list the pros and cons for each option and then compare them to their specific needs so that the best choice for their next vehicle can be made.
