Before deciding whether to buy or lease a car, let’s break down the difference between the two:
What is leasing a car?
Leasing a car is when you pay to drive a vehicle for a set time period, usually between three and five years. Instead of paying the full price, you pay the difference between the car’s new value and its anticipated residual value (what the dealer expects the vehicle to be worth at the end of the lease).
Leases generally have lower down payments and monthly payments. However, at the end of the lease, you must turn the car back over to the dealership – you can’t sell it or trade it in (though you can buy it off the dealer at the end of the lease if the contract permits). You’re also limited to a set number of miles during the lease.
What is buying a car?
Buying a car is more straightforward. You can either pay cash upfront for the full price of the car, or you can finance it through a lender. The car dealership can find a lender for you, but you’re also able to seek out loans from banks and credit unions on your own.
If you take out a loan, you’ll need to make a down payment and monthly payments, including interest, until the car’s paid off. You can keep driving the car for as long as you like, and you’re free to sell it or trade it in whenever you want.
Here’s a quick breakdown of what it’s like to lease vs. buy a car:
| Leasing | Buying | |
| Who owns the car | The leasing company or dealership, unless you exercise your option to buy at the end of the lease term. | If you pay cash, the vehicle is yours from the start. Otherwise, the lender owns it until you’ve paid off the loan. |
| Down payment | The required down payment when leasing is usually smaller than when financing (and sometimes, there’s no required down payment at all). | The required down payment when buying is usually larger than when leasing. |
| Monthly payment | Typically less than monthly loan payments. | Typically more than monthly lease payments. |
| Upfront costs | May include a down payment, security deposit, registration fees, taxes, and other costs. | May include a down payment, registration fees, and taxes. |
| Restrictions | Mileage limits and restrictions on most modifications. | Freedom to drive and customize as much as you’d like. |
| End of term | Must turn in the vehicle at the end of the lease; no trade-in value. (Note: you can sometimes buy the car at the end of the lease.) | Keep the vehicle after it’s paid off; free to sell or trade in when you want. |
| Credit | Builds credit if the leasing company reports lease payments to the credit bureaus; typically requires a higher credit score to get approved for a lease. | Builds credit if the financing company reports loan payments to the credit bureaus; can typically get a loan with a lower credit score than is required for leasing. |
