Should you lease that new car or should you buy it? It’s not a new question, but production slowdowns, inventory shortages and dealer profit margins have made it harder to navigate the choice. For one thing, there are fewer cars for rent in 2022 than in previous years, which means leases are more expensive, negating one of the biggest benefits of leasing: being able to drive a more enjoyable vehicle. than you could afford if you financed a purchase.
That said, there are still deals to be had and some consumers prefer renting. Abnormal market conditions also do not facilitate conventional purchases. While the choice ultimately comes down to your vehicle priorities and buying power, the fundamental questions of leasing versus buying haven’t changed. Here’s what you need to know before you lease or buy a new car.
Rental: the advantages
Since a leased vehicle is essentially leased for a fixed period, usually 36 months, although agreements exist for other loan terms, the monthly cost is lower than outright purchase.
Dollar for dollar, this usually gets a driver a premium vehicle that they couldn’t get for the same amount if they financed the full cost of the vehicle. When the lease is over, drivers can buy the vehicle for the agreed residual value or it will be sold, recovering the rest of the price for the lessor.
As with car buyers, renters are responsible for taxes and registration of their new vehicle, but how it is taxed depends on the state. Most states charge sales tax only on the depreciated amount of the leased vehicle, while some also charge tax on installments. However, as with purchased vehicles, sales tax can be financed and included in the monthly payment. While some manufacturers may offer “no down payment” leases, many agreements require a down payment to make monthly payments more affordable or include mandatory “acquisition fees”.
Since most new vehicles have at least three years of bumper-to-bumper warranty coverage, a leased car promises to be hassle-free with few unforeseen expenses. When it’s time to move on, there’s no haggling with private sellers or having to sell the car on your own.
Plus, serial lessees can jump into a new vehicle every two or three years with the latest styling and features. This might suit customers who need a short term transportation solution. For example, a minivan may suit a family’s lifestyle while the kids are still in strollers and car seats, but once the kids’ gear is removed, a sleek sedan or SUV more capable of all-terrain may be a better fit.
The downside of leasing is that you get no equity in the car. When the lease is over, you have the option to buy, which due to current market circumstances is attractive but may not always be. Plus, getting a lease every two years leads to an endless cycle of payments that is sure to cost more than buying a vehicle and keeping it for a decade or more. There are also limits to what you can do with your vehicle.
How many miles can you put on a leased car? Who is responsible for maintenance?
Leased vehicles often include routine service as part of the deal, which can save buyers hundreds of dollars on oil changes and maintenance. But finance companies usually limit the mileage of leased vehicles to preserve the value of their vehicle and keep costs low.
Each mile beyond the contractual amount, usually 10,000 miles, will be added to your final bill. Leases of 12,000 to 15,000 miles are available but will increase the monthly payment, meaning drivers on long trips or frequent carpool rides can also consider buying rather than renting. A move or change in moving circumstances can also result in significant costs at the end of the lease if you go over the limit.
Wear and tear is another hidden expense that often catches drivers off guard. Consumers can be charged for dents, paint scratches, or stained interiors, so it’s important to keep your rental vehicle in pristine condition. Customizations, popular for off-road and performance fans, are also prohibited, with many leases requiring all customizations to be removed before the lease returns.
Although most new vehicles include bumper-to-bumper warranties long enough to last through most leases, lessees are still responsible for routine maintenance. Some brands (but not all) also include a few years of routine maintenance in new vehicle purchases, and this extends to lessees.
What about financing a car?
Financing a car means that a buyer purchases their vehicle by obtaining a loan from a bank or other creditor that will span a certain period of time and require monthly payments that go to both principal ( what he owes on the car) and interest. Interest is generally determined by the creditworthiness of the buyer.
Sometimes automakers offer special financing terms, but qualifying for these incentives usually requires a very healthy credit score. Buyers also choose to put a large down payment on the car at the time of purchase, which reduces the loan amount and therefore the interest and monthly payment. Many car buyers use the money received for their trade-in as a down payment on their new vehicle.
Currently, used vehicle prices are at historic highs, helping to offset some of the high prices of 2022. However, as the average cost of new vehicles increases, buyers are turning to longer-term loans to lower the monthly payment, with 72- and 84-month terms becoming more common.
These long auto loans mean you’ll pay much more interest over time compared to 48 or 60 month terms. This puts buyers at risk of being “under water,” meaning their still-unpaid vehicle is worth less than they owe.
This is an especially big risk in 2022, as many new and used vehicles are selling well above historic values or MSRPs. The resale value of these vehicles may not hold up as well if inventory and prices fall back to historical norms in 2024 or later. While a dealer can mark up a Nissan Versa by $20,000 to $32,000 due to inventory shortages, five years from now that same Versa will likely be worth a fraction of the original MSRP. What goes up will eventually come down, and in the face of such a massive markup, a lease is a better bet.
What happens at the end of the lease? Can you terminate a car lease early?
The biggest difference between buying and leasing a vehicle is ownership. Buyers accumulate equity with each loan payment and have the opportunity to sell their vehicle. Whatever the difference between the sale price and the loan, it is up to them to keep it.
With leases, drivers return the vehicle to the finance company and pay a fixed return fee, typically $350 to $500. If they want to buy it or buy a new vehicle, they will have to provide a new down payment and agree to another term of monthly payments for what is now a two- to three-year used vehicle.
Drivers who need to end their lease prematurely may have trouble finding someone to take over the lease. Finance companies are not obligated to agree to an early termination of the lease, and even if a driver is able to find someone the finance company approves of to assume the lease, which is not guaranteed, he may be subject to penalties for early termination of the lease.
Take a decision
Buying a new vehicle is one of the most important financial decisions buyers make, and calculating payments, maintenance and resale value before heading to a dealership will help avoid make an impulsive or emotional choice.
Automotive and lending sites, including our partner site Forbes Advisor, offer lease and loan payment calculators to help plan as accurately as possible. It also doesn’t hurt to speak to a financial advisor at your bank or credit union about your options before jumping into the potentially high-pressure dealership environment.
In the long term, leasing is the more expensive option compared to buying a car and driving it into the ground, but record new vehicle prices and a shortage of reasonably priced used vehicles are two good reasons to weigh the two options.