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You’re ready to retire your old car and acquire a new ride. Or maybe you’re shopping for the very first car you can call your own. Should you buy or lease? It’s a great question because there are benefits and drawbacks with both options.
In terms of which is the most financially sound choice, here’s the simplest way to look at it:
- Buying a car and holding onto it for several years after it’s been paid off is usually cheaper than leasing over the long haul because there will be a period of time when you won’t have a payment and you can sell it to get some of what you initially paid back.
- Regularly leasing a vehicle means having a permanent car payment.
- Leasing often offers a lower down payment and lower monthly payments than a loan for the same vehicle, which translates to more short-term cash flow for you. However, you don’t own the vehicle at the end of the lease unless you take extra steps like buying out the lease contract.
“Leasing guarantees that you will have a car payment,” says Sean Scaturro, advice director and CFP professional with USAA. “Even though the new car smell will wear over time, the most financially sound approach is to buy a car and own it for several years.”
Financial considerations aren’t the only factors that go into a decision to buy or lease a car. You should also consider how much you drive, what sort of wear and tear you tend to put on your car, and whether you’ll be using the car for business purposes.
How you answer these questions can help you decide whether to buy or lease:
Do you drive a lot?
When you drive a leased car more than the lease agreement specifies, you’ll have to pay for those extra miles. A typical three-year lease agreement might charge you 15-20 cents for each additional mile driven beyond the lease’s annual limit, which is generally between 10,000 and 15,000 miles.
Some dealers will let you negotiate a lower per-extra-mile price if you pay for it upfront. If you think you’ll be driving 5,000 miles per year or more over the limit in your leased car, you should try to get those extra miles at a better price. Of course, if you buy your car, you can drive it as long and as far as you like.
If you drive a lot, you should probably buy.
Do you put a lot of wear and tear on your car?
A standard three-year lease agreement will tack on as much as three months of extra lease payments to your deal if you’ve been hard on the leased car. These wear-and-tear fees can accumulate when you get scratches on the car or damage the interior.
If you have kids who frequently spill stuff on your leased car’s upholstery, you’ll probably get dinged with wear-and-tear fees when you renew your lease. If you buy your car, you won’t feel the financial hit of such hard use until you go to sell it.
If you put a lot of wear and tear on your car, you should probably buy.
Questions to consider: Do you plan to keep renewing leases to acquire new cars? Do you plan on modifying the vehicle? Or do you need a new car every 2-3 years?
One of the benefits of leasing is you can simply trade in your car for a new one when the lease is up. But that may be one of the drawbacks as well.
“Once your lease is up and you go to sign another lease, you may be making another down payment. Over time you’re just making all these down payments but own nothing at the end of each lease. When you buy a car, even though it may lose value over time, you still own the car and can sell it if needed,” Scaturro says.
Keep in mind that a lease contract is negotiable just like anything else. You should always review the contract and negotiate to better fit your needs. This includes what will happen if you need to get out of the lease ahead of schedule due to a deployment or a PCS.
If you plan to lease a car or renew a lease, look for favorable down payment terms.
Do you want a car mainly for business purposes?
The IRS offers certain deductions for leased vehicles used for business purposes. Calculating these can get complicated and involve how much you’re driving the car for business rather than personal use, gas and maintenance costs, the price of the car and more. Consult a tax professional to determine whether and how you can claim a leased vehicle as a business expense.
An additional reason you may have for leasing is if it helps you professionally to have a newer car. Jobs that involve both driving and impressing clients, like real estate agent, might fall into this category.
If you plan on driving your car primarily for business purposes and use the quality and appearance of the vehicle as a marketing tool, you may want to lease. Talk with a tax professional to better understand the tax impacts of using a personal car for business purposes.
In most instances, buying a car rather than leasing it is the better long-term financial decision. When you purchase a car, you can use it however you please and you can modify it however you like. And if you choose to sell it, you’ll get back whatever the market value is for your car.
“One of the main drawbacks of owning a car, however, is that you do own it. So all the repairs, maintenance and upkeep are yours to manage,” Scaturro says. “Leasing for most people is a short-term benefit in exchange for a greater long-term cost. A cheaper monthly car payment now but a bigger cost over your next 10 years of driving.”
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About Sean Scaturro: Sean is an Advice Director at USAA and is responsible for advice points of view for Life, Health and Property and Casualty Insurance. Sean earned his bachelor's in political science and English from Arizona State University. He has a Master's in Business Administration (MBA) from the University of Arizona.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Originally posted in 2019 and updated in 2022
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