Should You Buy or Lease Your Next Vehicle?

Say you’re in the market for a new vehicle. Should you buy or lease it? The short answer is that leasing is often a better approach for upgrading at a lower current price, but that buying may be financially smarter in the long run. Let’s take a longer look at some of the main variables.

Monthly Payments

If you’re able to buy a vehicle without taking out a loan, more power to you. But most buyers will incur monthly charges on a loan based on the amount of the down payment and the going interest rate.

Leasing is often less expensive because you’re only paying for the depreciation of the vehicle during the term as opposed to principal plus interest included in a loan. So, you might be able to afford a better vehicle. But this can cost you more over time because you must keep paying a monthly fee when you’re perpetually leasing.

In contrast, you’ll build up equity in the vehicle by buying. Typically, you’ll reach a point where you have no monthly payments (unless you want to drive a new vehicle immediately after you’ve paid off the loan). This can free up money for other purposes.

Maintenance and Repairs

Whether you buy or lease, you generally have to pay for repairs and maintenance costs, such as oil changes, brake pad replacements and new wiper blades. But you might be able to avoid some regular maintenance expenses if you’re leasing instead of buying. For instance, if you don’t travel extensively, you may not need new tires during the term of a lease. However, if you own the car, you’ll have to replace the tires eventually.

Generally, you’ll require more repairs and upkeep the longer you keep the vehicle, which favors leasing over buying. Yet the costs for a new model you want to lease can be expensive.

Down Payment

One of the key aspects of the buying vs. leasing decision is the amount of cash you have on hand. Even if you’ll borrow most of the vehicle’s cost, you’ll have to make a substantial down payment. Typically, the dealer will request at least 20% of the vehicle’s cost. So, if you’re buying a new model for $50,000, you must come up with a minimum of $10,000 on your own.

This can be a hardship for cash-strapped individuals and often steers them in the direction of leasing. With a lease, you generally don’t have to make a large down payment if you have a good credit rating. In some cases, no down payment is even required.

But remember that you’re forfeiting the buildup of equity. Once the lease expires, you either hand over the keys or arrange a buyout, which can be pricey for a used vehicle. And you may have little or no negotiating room.

Additional Costs

Usually, you can lease a vehicle and drive up to 12,000 miles a year — or 36,000 miles over three years — without incurring any additional costs. If you go over the mileage limit, however, you’ll have to pay for mileage over the threshold (typically 10 to 25 cents per mile). This extra amount may add up quickly, especially if you drive extensively. Although you can pay for additional mileage upfront, it can be pricey and difficult to estimate what your needs will be. Thus, buying may be preferable for frequent drivers.

Similarly, if you break your lease early, you could be on the hook for termination fees that can cost up to the total amount on the lease. On the other hand, if you buy a vehicle, you may be able to trade it in for a reasonable amount or sell it privately and pocket the cash.

When you lease, you can also be dinged for the dings on the vehicle. The lessor will charge you a hefty sum for “excessive” wear and tear, including dents, windshield cracks and worn tires. Of course, you have to pay for repairs yourself out-of-pocket if you own a vehicle, but it’s your call to make.

Tax Implications

The tax angles may tilt you toward ownership if you operate a vehicle for business purposes. Generally, you’re entitled to deduct expenses attributable to business driving, including depreciation. The IRS allows you to choose between deductions based on actual expenses or an IRS-adjusted flat rate depending on business mileage. Although lessees can also claim tax benefits, the overall tax savings are usually not as favorable.

In addition, if you buy an electric vehicle (EV) for personal use, you may qualify for an enhanced tax credit. Currently, the maximum credit is $7,500. No credit is allowed for EV leases.

End of the Road

These factors should give you plenty to think about. Contact your financial advisor to help you crunch the numbers for your situation.

This article appeared in Walz Group’s November 27, 2023 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.