So, you’re in the market for a new — or at least new-to-you — vehicle. Outstanding! Of course, now the Big Question is … not what you think.
Nope. Rather than What are you shopping for? the Big Question is, What’s your acquisition plan?
For most serious car shoppers, the choices are (a) buy (with a car loan) or lease, and (b) new or used. If you’re a person on a budget who’s leading with your head and not your heart, neither option is a simple call.
And that’s all to the good, so long as you enrich yourself with research and aren’t intimidated at the dealership. The fact that it’s hard to choose between buying and leasing (or new or used) reflects today’s competitive market, which can benefit you.
While buying remains the preferred American strategy, leasing has carved out a significant portion of the market. At midyear in 2019, automotive industry researcher Edmunds put lease penetration at a record 32.2% (which still leaves 67.8% for buyers). Whether it was the work of COVID-19, the election, economic jitters or some combination, numbers-tracker Statista found leasing slipped back to 26% in the summer of 2020.
The debate over leasing vs. buying, launched when leasing became popular in the late 1980s, continues to rage, with no resolution in sight.
How Does Leasing a Car Work?
Vehicles have gotten steadily more expensive, and Americans are wincing from it. Market researcher Cox Automotive reports between 2012 and 2019, the percentage of cars priced at less than $30,000 dropped 19 points, to 35%; meanwhile, vehicles priced above $50,000 quadrupled to 24%.
Small wonder that 48% of consumers say owning or leasing a vehicle is becoming too expensive, up six points from 2015.
In October 2019 ,the Wall Street Journal lamented this condition in a story headlined “The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars.” We’re old enough to remember Dad telling us if we couldn’t pay off a car in three years, we couldn’t afford it.
One way of affording the unaffordable car is by leasing. In short, you arrange to rent the car for a certain length of time, either from the dealership or a financing firm that handles leases.
Not so fast: Before reaching out to either, the Federal Trade Commission recommends getting a fresh copy of your credit report from one of the three major credit-reporting agencies (Experian, TransUnion, Equifax).
After making a combined down payment and acquisition fee that may be thousands less than the down payment for a purchase, your monthly payment is figured on the car’s likely depreciation during the lease term, plus fees and money costs.
At the end of the lease, you may return the car, settle any differences over wear and tear (or, if it’s still showroom perfect and you’ve driven less than agreed upon, cash in your lease equity) and move on to your next car.
Or, if you’ve grown to like it, you can negotiate to buy the car rather than give it up.
Pros and Cons of Leasing a Car
Let’s be clear: There is no right or wrong about leasing or buying, no matter what the advocates say. Instead, what matters is which choice better suits the person acquiring the car. Sometimes leasing makes sense; sometimes, not so much.
Pros of Leasing a Car
We are well-acquainted with, and are even quite fond of, many people who ardently believe two things about adulthood:
- No self-respecting grown-up willingly sits behind the wheel of a car more than four (maybe even three) years old.
- Monthly car payments are an immutable fact of modern life.
If these ideas are part of your faith tradition, too, you’ll be keenly interested in the advantages of leasing, which include:
- Leasing is flexible. Pick the term that best fits your sensibility and budget.
- Monthly payments tend to be substantially lower than payments on a car loan, allowing you to squeeze a more expensive, more luxurious, or more exotic vehicle into your budget.
- Your car is likely going to be under factory warranty throughout the lease period, so you probably won’t be on the hook for major repairs. Depending on the lease, you might not even have to pay for routine maintenance (oil changes, filter replacements, tune-ups).
- Like our friends, you always will be driving something next-to-new. When the lease expires, you wrap yourself in that new-car smell all over again, maybe from the same dealer, maybe from someone else.
- You don’t have to — and you should not — tell the car dealer you plan to lease until after you’ve finalized the car’s purchase price.
- Your sales tax bill will be significantly smaller.
- You won’t have to negotiate a trade-in when you’re ready for your next shiny new ride.
- You be following the advice of 20th century oil baron and financial philosopher J. Paul Getty, who said, “If it appreciates, buy it. If it depreciates, lease it."
Cons of Leasing a Car
Getty notwithstanding, leasing a car has its downsides. Don’t take our word for it. Here’s Terrance Odean, professor of finance at the University of California-Berkeley’s Haas School of Business, a full-throated critic of car leasing who podcasts, conveniently, in bullet points:
- “One, leases are complicated and often contain hidden fees. There's a good chance you're going to end up paying an amount more than you thought the salesperson quoted you.
- “Two, leases are long-term contracts. So, if you lose your job, or simply can't handle the monthly payments and decide to return the car, you will have to pay an expensive early termination fee to get out of that contract.
- “Three, at the end of the lease period you don't own anything. Sure, the monthly lease fees are lower than loan payments, but when the lease is up you own nothing. And chances are you're going to start another lease and keep on paying. …
- “No. 4, at the end of the lease you return the car to the leasing company. You're going to get charged for any tears, scratches, and dents that the company deems more than ordinary. …
- “And No. 5, if you return a car to the leasing company with more than the annual mile limit, often 12,000 miles a year, you may be charged as much as 20 cents a mile for the extra miles. Drive an extra 2,000 miles a year for three years, that could cost you $1,000.”
Pros and Cons of Buying a Car
Buying a car once was, and remains for most, a piece of the American dream. Buying means ownership, dominion, mastery. That sleek and gleaming hunk of metal is yours. In the 1960s, the Beach Boys famously harmonized on that singular feeling in Little Deuce Coupe: “There’s one more thing, I got the pink slip, daddy.”
Usually, a car purchase involves haggling over price (do your research), some sort of down payment — cash, a trade-in, or both — and financing terms that, as noted above, can stretch as long as 84 months.
When the car is paid for, it’s yours. No more car payments. Keep it, and except for car expenses like maintenance and repair costs, your budget should tip well into the black.
Pros of Buying a Car
The upside of buying includes:
- In the autumn of 2020, as with most of the year, interest rates on car loans have been historically low — around 2.5% for borrowers with good credit — and some manufacturers are offering zero-percent loans with payments deferred for 90-120 days.
- When the loan is paid off, you own the car. These days, well-kept vehicles continue to perform superbly well past 100,000 miles.
- A buyer does not have to worry about the number of miles piling up on the odometer.
- Buyers may sell or trade in at any time.
- Insurance premiums tend to be lower.
- Owners who are enthusiasts can modify their car, truck, or SUV to suit their fancy.
Cons of Buying a Car
The downside of buying includes:
- You have to make a substantial down payment or you’ll immediately owe more on the loan than the car is worth.
- Monthly car payments tend to be higher than lease payments.
- When the warranty expires, the owner is responsible for repair costs.
- You’ll have more of your cash tied up in a depreciating asset.
- When you’re ready for the next car, you’ll probably have the heartache of negotiating your trade-in or selling.
Is It Better to Lease or Buy a Car?
At the risk of repeating ourselves, no absolute answer exists for whether leasing or buying is “better.” There are simply conditions, circumstances, preferences, and budgets.
Leasing may be more attractive when you:
- Lack the savings to buy outright, or to make a 20% down payment.
- Want a vehicle that’s out of your purchase-price comfort zone.
- Are unlikely to exceed whatever mileage limit you agree upon — usually between 10,000 and 15,000 miles annually.
- Are tenacious about tending to the car’s good appearance inside and out.
- Anticipate leasing again when the current term expires.
Buying may suit you better when you:
- Have cash and/or a coveted used car to make a substantial down payment.
- Intend to keep the car for a significant period of time — five years or more.
- Need — or want — to drive a lot.
- Have the budget to make certain the car gets regular maintenance, and can afford to have repaired the occasional mechanical problems inherent in older vehicles.
- Like to tinker, or have someone else tinker, with the car to personalize it.
Leasing vs Buying a Car with Bad Credit
Acquiring a car is complicated enough without adding problematic credit. Nonetheless, while those with scores below 670 (fair) and even under 580 (poor) will find tougher going, they are not entirely out of the game.
Before you plunge, know your credit score. Get that free credit report the Big Three owe you once every dozen months. You may be surprised. Maybe you’re not as bad off as you imagined, or maybe your report is dragged down by faulty or outdated information you can fix.
However, if the news is unfortunate, you have more than one way forward.
Those seeking a lease with bad credit are likely to see higher interest rates on their contract than their better-credit peers. They also may have trouble scoring their first-choice car. But if you are flexible, you can get to an agreement.
Buying a car is no picnic for those with low credit scores, either.
Some of the keys to success: Pick the right car for your circumstances. Be ready with a substantial down payment. Shop around for a lender willing to provide a preapproved loan.
Or, you can do something rash.
Want to experience a high interest rate with a company that keeps an army of repossessors on retainer? Visit one of those buy-here-pay-here (BHPH) dealerships. Typically catering to consumers with poor credit histories, these independent sellers charge punishing interest rates and often offer no grace periods in their contracts; miss a car payment and the dealer will unleash the repossessors.
You may be better off shopping area banks (national, community, online), credit unions, finance companies, an/or websites that act as clearing houses for lenders.
Is there someone with good-to-excellent credit who trusts you, and whom you will not let down? Consider enlisting that person (or persons) as a cosigner for your loan or lease agreement. That way you can leverage their better score(s) to your advantage.
Again, whether someone with bad credit leases or buys is, ultimately, a decision best left to the individual. Do the research; compare the options and weigh them against your short- and long-term budgets; and honestly assess which path leads to the car you’ll be happiest with for the duration of the lease or loan.
FAQs about Leasing vs Buying a Car
You have questions. We have some answers.
While the practice is less common — around 4% of the leasing market — you absolutely can lease a used vehicle. Choosing that route, with its comparatively low monthly payments, could bring the sort of luxury or exotic car into your realm that otherwise would be unaffordable.
But even if your tastes (and budget) indicate a more conservative choice, shop for a ride that retains its value. Remember: A lease payment amounts to the vehicle’s depreciation divided over the length of the lease period (plus fees and interest). Less depreciation is money in your bank.
Remember, too, everything is negotiable. Do your homework to get the best deal.
Here’s where it gets really interesting. Suppose you’re eyeing a new car that hasn’t changed significantly in two or three years. Suppose that new car’s senior cousins have come back from leases in good condition, or have been part of a reputable dealership’s courtesy carpool. (In either case, they’re certified and backed by substantial warranties.)
Negotiated properly, the impact to your monthly budget is going to be somewhat similar no matter what you choose. With a new-car lease, you’re paying off the anticipated depreciation during the length of the term. With a used-car purchase, that depreciation is already discounted from your purchase price.
With those factors being roughly equal, you have a fascinating decision to make. And we’re not going to make it for you. Refer, instead, to the factors in the sections above.
Bottom line: After doing your homework, which choice fits better with your budget, personal tastes, transportation priorities, and lifestyle intangibles? Again, are you a keeper or a trader? A statement-maker or a pragmatist? Stay-the-course or cutting-edge? Know yourself and you will know whether buying or leasing is right for you.
You can, indeed, refinance a car lease. But it will be complicated. Especially if you want to refinance early in the lease period when the car has lost the greatest amount of value and you’re probably upside down in your contract. Worse, leases often have termination fees that kick in if you want to reshape your deal.
If you’re determined, contact the leasing company for a lease-payoff price tag. Take that number and details about the car to banks, credit unions, or other car financing companies. An actual lease refinance may be hard to nail down, but you might be able to score a refinance loan that allows you to buy — and ultimately own — your car..
Want out of your car lease early? You have options.
- Sell your car to a dealer. If it’s worth enough — used-vehicle prices surged through the Summer of COVID-19 and began to cool only with the autumn temperatures — you will recoup enough to pay off the lease and its sundry termination penalties.
- Exercise the early buyout clause using your savings and/or a loan and sell the car yourself for a better price.
- If, on the other hand, you’d wind up on the hook for a bundle by selling the car, you could seek a lease swap: Transfer the remainder of the lease period to another person. Lease-trading sites, such as Swapalease and LeaseTrader, allow you to post the terms of your deal for a small fee. Or maybe a friend or relative would like to take over your obligation.
What happens to your credit if you “break” your lease all depends on how the deed is done. If you simply stop making payments, default, and wind up in collections, yes, your credit score will take a hit.
On the other hand, if you satisfy the terms of the lease using one of the methods mentioned above, your credit won’t suffer even though you didn’t fulfill the length of the term. Bottom line: You’ll be OK so long as the lender wasn’t harmed financially
- Eisen, B. And Roberts, A. (2019, October 1) The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars. Retrieved from https://www.wsj.com/articles/the-seven-year-auto-loan-americas-middle-class-cant-afford-their-cars-11569941215
- Kaufman, W. (2020, August 5) Edmunds: With low interest rates, should you lease or buy? Retrieved from https://www.washingtonpost.com/business/edmunds-with-low-interest-rates-should-you-lease-or-buy/2020/08/05/bcf7bbe2-d702-11ea-a788-2ce86ce81129_story.html
- Consumer Reports (2017, September 19) Leasing vs. Buying a New Car: Comparing the two major finance choices. Retrieved from https://www.consumerreports.org/buying-a-car/leasing-vs-buying-a-new-car/
- N.A. (ND) Financing or Leasing a Car. Retrieved from https://www.consumer.ftc.gov/articles/0056-financing-or-leasing-car
- Odean, T. (ND) Should You Lease or Buy a Car? Retrieved from https://faculty.haas.berkeley.edu/odean/Video%20Transcripts/Should%20you%20lease%20or%20buy%20a%20car_.pdf
- Akin, J. (2019, January 10) Can You Lease a Car With Bad Credit? https://www.experian.com/blogs/ask-experian/can-you-lease-a-car-with-bad-credit/
- N.A. (ND) How to Lease a Car and Get the Best Deal. Retrieved from https://guides.wsj.com/personal-finance/buying-a-car/how-to-lease-a-car/