Auto Loan vs. Auto Lease
What to know when asking ‘Should I buy or lease a car?’
You’re in the market for a new car, and you’ve been weighing the options of leasing vs. buying a car. To help you make your decision, we’ve developed a list of pros and cons for leasing, as well as the major differences between the two options. (Hint: The differences are much like renting a house vs. buying a house!)
Pros and cons of leasing a car
The percentage of new vehicles that are financed has increased about seven percent in the past five years, due, in part, to an increase in new car prices.
Leasing a car: The pros
- Many people who opt for leasing a car vs. buying a car often find their monthly payments are lower. While loan payments are based on how much you owe on the price of a vehicle, lease payments are based not on the car’s retail value, but on the amount of the car’s value that will depreciate during the lease. Another common reason for leasing a car is having the freedom to turn the car in at the end of the lease period rather than having to sell it.
- Those who lease also enjoy having that new car smell every three years or so.
- Always having new cars also may mean fewer trips to the repair shop.
Leasing a car: The cons
- Of course, there are some disadvantages to leasing. While leasing comes with the freedom of not having to sell a car, the ability to turn the car in before the lease is up usually comes with early termination fees.
- In addition, leased cars have mileage limits—exceed those limits and you’ll be charged a pre-specified per mile fee when you turn the car in.
Leases often require you to purchase GAP (Guaranteed Auto Protection) coverage in addition to regular car insurance. GAP covers what is still owed on the lease should the car be totaled in an accident or natural disaster.
Leasing vs. buying a car: 5 major differences
|Vehicle Loan||Vehicle Lease|
|Ownership||The bank owns the car until you pay off the loan.||Leasing is like a long-term rental. You pay rent for use of the car.|
|Duration||Loans are typically taken out for 4 to 6 years.||Lease terms are usually 2 to 4 years. At the end of the lease, you have the option to return the vehicle and walk away, purchase the vehicle for the residual value or lease another vehicle.|
|Repayment||Monthly loan payments are based on how much you decide to finance of the total price, interest charges, taxes and other fees.||Monthly payments are based on the vehicle’s expected depreciation during the lease term, rent charges, taxes and other fees.|
|Mileage and Other Limitations||There is no limit to the number of miles you drive, and you are allowed to customize the car however you like.||Most leases impose a vehicle mileage limit. If you exceed these miles, you will be charged a per mile fee when you return the vehicle. You are not allowed to alter the vehicle, and you may be charged extra if the leasing company determines there is more wear-and-tear on the vehicle than the contract allows.|
|Coverage Obligations||Your financial institution, which will be listed on your insurance policy, may require full coverage insurance on the vehicle.||The leasing company, which will be listed on your insurance policy, may require you to carry specific minimum coverage on the vehicle.|
If you have questions about insurance coverage as you weigh the option of auto loan vs. auto lease, contact us. And, enjoy your new car!