Deciding between buying and leasing a car is a choice that largely comes down to personal priorities. For some drivers, the choice boils down to a question of what makes the most financial sense. For others, it’s more about owning a car they can call their own for years to come. Before choosing which route is right for you, it is important to recognize the distinction between buying and leasing.

Leasing 101

Leasing a vehicle essentially means that you are renting the vehicle from the dealership for an agreed upon period of time, usually 36 or 48 months. When that leasing period is over, you would then have the option to return the car to the dealer or to buy the car at a predetermined amount detailed in the leasing contract. That’s a big difference between buying a car, as you would own the vehicle outright once your loan is paid off.

That is why it’s crucial to understand the key differences between leasing and buying: a lease’s monthly payments are usually lower than what you would pay for a loan, you’re not building up any of the equity you would in a loan payment if you opt to lease instead, and you can buy a leased vehicle at the end of the agreement for a pre-arranged price.

Monthly car loan payments are usually calculated based on the sale price of the vehicle, the interest rate, and the number of months required to pay off the loan, whereas a monthly lease payment depends on a few more factors.

In addition to figuring in the sale price of the car and the duration of the lease; the expected miles you will drive, the residual value of the vehicle at the conclusion of your lease, and the rent charges and other fees all make an impact in what you will pay. Most leases allow for 10,000 miles of driving each year, but a higher mileage allotment can be worked out with a dealer for an increase in your monthly payment. If you end up going over your annual amount, the dealership will charge you for every extra mile you drive.

A vehicle’s residual value is its value at the end of your lease period with depreciation figured in. If you decide to purchase the vehicle at the conclusion of your lease, this is what you will pay.

Some dealerships will require you to make a down payment for a lease. The more you pay here, the lower your monthly costs will be. Keep in mind, it might not make the most sense to put too much cash down on a car you ultimately will not keep.

Leasing: Advantages and Disadvantages

The biggest downside to leasing a car is that you don’t build up any equity with your payments like you would if you were paying off a loan. It’s a little like renting an apartment, you make a payment but you have no ownership claim once your contract is fulfilled.

However, there are advantages to leasing as well.

If you decide to lease a vehicle, your monthly payments will likely be lower than if you were paying off a loan. Another benefit of leasing is that you can try a new car out every few years. Unless you have incurred any unforeseen fees from abnormal wear on the car or from going over in miles, you simply return the car at the end of your lease and that is that.

Plan for the Long Term

If a main concern of yours in making the decision between leasing and buying a vehicle is the long-term financial impact, then leases might not make the most sense for you. Because you don’t build equity and therefore don’t have any ownership over the car, coupled with having to pay certain fees in the leasing process, experts will usually agree that buying a car outright is the more cost-effective move; particularly with vehicle loan rates as affordable as they are now.   

If you decide that taking a loan out and buying a car is the move that makes sense for you, then it’s worth looking into using an auto loan calculator to determine what loan term and interest rate makes the most sense for your needs.