Lease vs Buy? What’s the Difference?
One of the best ways to decide between car leasing and buying with a loan is to directly compare the attributes of each, which we will show you in this article. We’ll tell you about how payments compare, about how fees are different, about advantages, and disadvantages.
Another way to help make a decision between leasing and buying is to compare the cost of each for a specific lease vs. buy situation. For this, you’ll need a special Lease vs. Buy Calculator.
Now, let’s take a look at how car leasing compares with buying with a loan.
How is car leasing different from car buying with a loan?
> Leasing – Monthly lease payments are roughly 30%-50% less than loan payments for the same car, same term because you only pay for the vehicle’s predicted depreciated value, not the entire value. The average vehicle will depreciate approximately 50% in three years.
> Buying – Monthly loan payments are higher because you pay for the entire cost of the vehicle, which includes the depreciated value. The average vehicle will depreciate approximately 50% in three years.
PAYMENT DUE DATE
> Leasing – Payments are due at the beginning of the month. Your first lease payment is due at the time you sign your lease contract.
> Buying – Payments are due at the end of the month. Your first payment is due one month after you sign your loan contract.
> Leasing – Leasing does not require a down payment (“cap cost reduction”). However, some special lease deals may require a down payment in order to get the deal. Making a down payment lowers the monthly payment.
> Buying – Buying with a loan usually requires a down payment, as much as 20%. Making a down payment lowers the monthly payment.
> Leasing – Typically includes: down payment (if any), first month’s payment, taxes, registration fees, and possibly a security deposit.
> Buying – Typically includes: down payment, taxes, and registration fees. No security deposit is required.
> Leasing – Sales tax is based on and paid with monthly payments (in most states), instead of all up front on the entire value of the vehicle. This saves money for the leasing customer.
> Buying – Customers pay sales tax on the entire purchase cost of the vehicle up front, but is usually rolled into the loan as an extra cost. If the customer sells the vehicle later, there is no partial sales tax refund. If he trades, there may be a tax refund — in some states.
> Leasing – Leases sometime require a security deposit, which is returned at lease-end. The amount of the deposit is typically about the same as one month’s payment. Customers with good credit often don’t have to leave a security deposit.
> Buying – Security deposits are not required, although down payments are usually required, unlike leasing.
> Leasing – Since leasing is designed to only pay for depreciation (with lower payments), you don’t build ownership equity. You return the vehicle to the lease company at lease-end, or purchase your vehicle for it’s depreciated value.
> Buying – By making higher payments, you not only pay for depreciation but also build up ownership equity. At the end of your loan, you receive the title and own the vehicle. It’s value, however, has depreciated and your ownership equity is significantly reduced.
> Leasing – Laws in most states require you to have insurance. Lease companies require that you pay for insurance on your leased vehicle. The level of required coverage may be higher than is required by state laws.
> Buying – Laws in most states require you to have insurance. Loan companies may require you to have a minimum level of insurance to protect their interest in the vehicle. The level of required coverage may be higher than is required by state laws.
> Leasing – Lease companies require that you keep your vehicle in good condition and maintain it properly. You are not required to have your maintenance done by a dealer.
> Buying – You are free to maintain, or not maintain, your vehicle as you like. However, if you expect to possibly sell or trade your vehicle in the future, the buyer may be interested in how the vehicle was maintained.
> Leasing – Most leases come with automatic GAP coverage, or a waiver, that pays off your lease if your car is stolen or totaled in an accident. It makes up the difference (gap) between what your insurance pays and the amount still owed on the lease.
> Buying – Loans do not come with GAP insurance. It must be purchased separately. If you will be upside down on your loan, which is very common, and should have GAP insurance to protect yourself in case of insurance shortfall if your car is stolen or totaled.
> Leasing – The cost of early lease termination can be expensive due to the fact that your low monthly payments do not keep up with the rapid depeciation of your vehicle. You nearly always owe more on the lease than the vehicle is worth, until near the end.
> Buying – Ending a loan early by selling or trading can be expensive because payments may not have kept up with the rapid depreciation of your vehicle. You may be upside down, which means your still owe more on your loan than the vehicle is worth. This can happen if you rolled another loan balance into your current loan, made little or no down payment, or have a long-term loan.
END OF TERM
> Leasing – You can return your vehicle to the lease company, or purchase it for the price specified in your lease contract. Some fees may apply (see below).
> Buying – You own the vehicle and may choose to 1) keep driving it, 2) sell it for its depreciated retail value, or 3) trade it for its depreciated wholesale value. No fees are required at end of loan.
> Leasing – Most leases require a “disposition” fee at lease-end as a kind of administrative fee for handling the return of the vehicle. The amount is typically about $350. The fee is not required, usually, if you choose to buy the vehicle at lease-end.
> Buying – There are no fees or charges at the end of loan.
> Leasing – Typical leases allow 10,000 to 15,000 miles per year. Additional miles may be purchased up front. Excess miles are charged at a rate of 15-25 cents per mile to compensate the lease company for the extra depreciation.
> Buying – Since you will own your vehicle at the end of your loan, any extra depreciation caused by high mileage is reflected in reduced resale or trade value for your vehicle. Miles aren’t free, regardless of whether you buy or lease.
WEAR AND TEAR FEES
> Leasing – If you have damages or excessive wear and tear at lease-end, you will be charged by the lease company for the repairs to restore the car to a good resellable condition. It’s better and less expensive to have the damages repaired yourself before returning your vehicle to the lease company.
> Buying – Since you will own your vehicle at the end of your loan, any extra depreciation caused by damages or excessive wear and tear are reflected in a reduced resale or trade value for your vehicle.
> Leasing – Dealer profit comes primarily from the negotiated sale price of a vehicle. Many customers don’t realize that lease prices can be negotiated and therefore give the dealer more profit than necessary.
> Buying – Most customers know that prices can be negotiated when buying, but often don’t. Fundamentally, buying and leasing offer a dealer the same profit potential.
BUSINESS / PERSONAL USE
> Leasing – Leasing offers similar benefits for both personal and business vehicle use. Business users can deduct lease expenses from taxes. Personal users cannot deduct.
> Buying – Buying is not as convenient for business users, who can deduct vehicle expenses, but not quite as easily as with leasing. Personal users cannot deduct.
> Leasing – Dealers don’t finance leases. They hand off lease financing to the manufacturer’s finance company (Ford Motor Credit, GMAC, etc.) or a national bank. The finance company pays the dealer for the car and works out payment details with the customer. Independent lease sources are difficult to find.
> Buying – Dealers don’t finance loans. They hand off loan financing to the manufacturer’s finance company (Ford Motor Credit, GMAC, etc.) or a national bank. The finance company pays the dealer for the car and works out payment details with the customer. Independent loan sources are easy to find.
> Leasing – Interest rates are about the same as for loans, and depend on your credit score. Lease rate is called “money factor” and can be converted to APR by multiplying lease rate by 2400.
> Buying – Interest rates are about the same as for leases, and depend on your credit score.
> Leasing – Requires you have a good credit score, income, and reasonable debt. Lower credit scores will require a higher lease rate, and possibly a down payment and security deposit.
> Buying – Requires you have a good credit score, income, and reasonable debt. Lower credit scores will require a higher interest rate and higher down payment.
> Leasing – Total finance charges are usually higher for a lease than for a purchase with a loan. Low payments are slow at paying down the lease.
> Buying – Total finance charges are usually lower for a loan, assuming the same term. However, most loans have longer terms (in months) than most leases, which evens out total cost.
CALCULATING MONTHLY PAYMENTS
> Leasing – You can use an online lease calculator such as the one at LeaseGuide.com/calc.htm
> Buying – You can use an online loan calculator such as the one at Auto Loan Calculator.