This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Auto leases and loans are both viable ways to get your hands on a new vehicle. Here’s how to decide which one is best for you.
Image source: Getty Images
You’ve found the perfect car, but that’s only half the challenge. Now you have to decide how you want to pay for it. Leasing and purchasing both have their pros and cons, and it’s important to understand them before deciding which is right for you. Here’s what you need to know so you can make a decision you’re happy with.
How auto loans work
Auto loans are similar to any other type of loan: You find a lender who is willing to back you. It then gives you the money for the purchase and charges you an interest rate that’s determined by your credit history, the loan term, and market conditions. You might have to pay closing costs when you take out the loan, and then you make monthly payments for a number of years.
If you do this, you own the vehicle free and clear in the end. Fail to keep up with your payments and the lender can take it back from you — commonly called repossession — and sell it to get its money back.
Here’s a brief look at the pros and cons of buying your vehicle:
Auto loan pros
Generally cheaper over the long term, especially when holding on to the car after the loan term endsThe vehicle is yours, free and clear at the end of the loan termOption to customize your car however you wantNo limits on how many miles you can drive
Auto loan cons
Monthly payments are generally more expensive than leasesMaintenance costs are the owner’s responsibilitySelling or trading it can be a pain
How auto leases work
Auto leases are essentially long-term vehicle rentals. You agree to borrow a vehicle for a set amount of time — usually two to three years — and during that time, you pay taxes, fees, and interest, plus the amount the car depreciates. This is generally cheaper than a loan monthly payment. Lessees pay about $143 less per month than loan borrowers on average, according to Experian.
But leases have rules. Drivers can’t make any permanent changes to the vehicle, and they’re also restricted to how many miles they can drive. Violating these rules or putting excessive wear and tear on the vehicle results in additional fees. Early termination of the lease can also carry a fee. And, of course, you’ll still have to pay for things like insurance and tires yourself.
Companies typically offer leases on new cars, so there are generally fewer maintenance issues, and some leases may even come with free scheduled maintenance. At the end of the lease term, you can choose to purchase the vehicle or upgrade to a different leased vehicle.
Here are the pros and cons of leasing a vehicle:
Auto lease pros
Cheaper monthly paymentsMay be able to afford a newer, more expensive vehicle than you could if buyingNo need to sell it at the end of the termFree scheduled maintenance with some lessors
Auto lease cons
You don’t own the vehicle unless you choose to buy it at the end of the termMore expensive than buying in the long run if going from one lease to anotherPotential for a bunch of extra fees if lease terms are violated
How to decide whether an auto lease or loan is right for you?
Whether to buy or lease your vehicle is a highly personal decision. When weighing the two, it’s important to consider the short- and long-term financial implications of your decision. Monthly payments are understandably a huge factor in your decision. But you should also look at how much you’ll pay in total over the life of a lease or loan.
To do this, you’ll probably need to talk to a few lenders and lessors to learn what they can offer you. Review the terms of your lease or loan to make sure you’re comfortable with them, and don’t be afraid to ask questions if there’s anything you’re unclear about.
Finally, consider non-monetary factors, like the type of vehicle you want. If you’re interested in a new vehicle that’s too expensive for you to buy, for example, a lease might be a better option. Or if you have young kids you worry might damage or sully the vehicle, a loan could help you avoid paying extra fees for excess wear and tear.
Take your time and don’t rush into a decision. Whichever way you go, you’re locking yourself into several years of monthly payments, and that’s not a decision to make lightly.
Our best car insurance companies for 2022
Ready to shop for car insurance? Whether you’re focused on price, claims handling, or customer service, we’ve researched insurers nationwide to provide our best-in-class picks for car insurance coverage. Read our free expert review today to get started.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
