Is it Better to Lease, Finance, or Outright Buy My Next Car?

Now, let’s dig a little deeper and explore some of the differences and pros and cons between these options.

If you’ve rented a vehicle for the day or a weekend, you know the drill: You pay a set charge and—unless you go over the mileage limit or ding the fender—when you’re done you simply hand back the keys. In certain ways, leasing a car works similarly.

Leasing a car is a lot like renting a car, but for a longer period of time. You get to enjoy the car while it’s in your possession but if you have a typical car lease agreement and not a lease-to-own contract, you're not building any equity in the vehicle with your payments. So, once your fixed-term lease agreement runs out, you won't own the car. Instead, you'll bring the car back to the dealer (but, depending on the terms of your lease agreement, you may also have the opportunity to buy it outright at that time with cash or financing).

It's important to note, however, that returning a leased car may not be as easy as bringing it back to the dealership and handing them the keys. Most leases include lease penalty provisions, such as penalties for excessive wear and tear or for exceeding the mileage set out in the lease. Depending on the condition or mileage of the car when you return it, you may need to pay extra charges to account for any penalties.¹

While you'll need to make monthly payments whether you're leasing or financing your car, the big difference between leasing and financing is ownership.

When you lease a car, you'll need to return the vehicle to the auto dealer at the end of your lease. But when you finance your car, your monthly payments go towards building up your equity in the car, and, as long as you continue making your required payments, you'll own the car at the end of the financing term.

Leasing has both pros and cons. The main benefit for many people? Monthly lease payments are almost always lower than financing payments² (we’ll talk more about financing below). That’s because, with a lease, you’re only paying for a vehicle’s depreciation during the lease. And from a credit perspective, a lease is like a loan, so if you're consistent with your payments, leasing can also help you build (or rebuild) your credit score.³

There are certain limitations with leasing, however. These may include:

• Mileage. A lease agreement usually includes a strict kilometer limit. If you exceed this limit by the end of the lease, you’ll usually have to pay penalties.⁴
• Excessive wear and tear. If you don’t take care of the vehicle, and the wear and tear on it is beyond what’s set out in the repair standard outlined in your lease contract, there could be additional charges when you return your car at lease end. ⁵ (You may want to consider purchasing a lease damage warranty from the dealer, which could help reduce the amount you might otherwise  need to pay for any excessive wear and tear.)⁶
• Early lease termination. If you want to end your lease early, you’ll need to pay any outstanding payments still left on the lease and/or an early termination fee,⁷ unless you're able to transfer the lease rather than ending it. For example, you might transfer the lease to a family member or friend, or use a lease-takeover service— but there might still be costs involved, as your lease agreement may require the payment of a lease transfer fee, plus the transfer process could get a bit complicated.⁸

Just like leasing, however, there are some potential pros and cons. One of the long-term benefits to financing is that, once the loan is paid off, you own the car. And it has resale value, so if you choose to sell it, you may be able to recover the remaining equity in your vehicle. Other advantages may include:

• Low interest rate deals.. Dealers sometimes offer low interest rate deals (subject to conditions). Taking advantage of a low-rate deal could help reduce your financing costs.
• Credit score. Like lease payments, if you make your monthly car loan payments in full and on time, vehicle financing could help you rebuild your credit score.⁹
• Flexibility. You can sell your car or use it as a trade-in for another car, without worrying about end-of-lease charges (although you'll need to pay off your financing first).
• No mileage limits. Unlike a car lease agreement, there are no mileage limits when you finance, so you can drive to your heart’s content (but keep in mind, a higher number on the odometer could lower your vehicle’s resale value in the future).

There are some downsides to financing, though. For example, monthly financing payments are usually higher than monthly  lease payments for the same vehicle, because financing payments are based on the car’s entire purchase price, plus interest and other charges (as opposed to leasing, where payments are based on the time you’re in possession of the vehicle).

Most of us don’t have the funds for the full price of a new car sitting in our bank account, but if you’re lucky enough to be in that position, paying cash to buy your car outright, either from a dealership  or a private buyer, may be worth it.

But whether it's worth buying outright or going another route will depend on your personal circumstances. You'll want to consider factors like:

• how much cash you have on hand
• how long you intend to keep the car
• whether your money would be better used elsewhere. 

One of the plus sides of buying a car outright is not having to pay interest. But even though you might be saving by not paying interest, it may not always be the better decision. For example, if you think you might need the cash later on or if you're someone who likes to swap for the latest car model, going the leasing or financing route may be a better option.

Here's another thing that might be worth considering: If you keep your cash available for other projects or investments, it may actually earn you a higher return than the interest you’d be paying if you leased or financed the car.

The bottom line? If you believe the cost of borrowing for a lease or loan outweighs what you'd earn from investments, buying the car outright may be worth it. Otherwise, leasing or financing might be the better way to go. Ultimately, the best option for you will depend on your own individual circumstances.

Choosing between leasing and financing depends on your lifestyle and priorities.

Leasing lets you drive a new car every two to four years with monthly payments that are typically lower than what you'd be paying if you went the financing route for the same vehicle. So, leasing could be a good choice if, for example, you prefer the latest features available with a new car model, or if you don't want the hassle of selling or trading in a car later.

Keep in mind, though, you'll have less flexibility with leasing when it comes to mileage, plus you're paying a large amount for something you'll never own or be able to resell (unless your lease has a buyout option at lease end and you decide to take advantage of this option).

Financing might be the better option if you want to own the car outright eventually. While your monthly payments will usually be higher, you're building equity, and once you've paid off the loan, you'll own the car and be able to take advantage of its resale value by selling it or using it as a trade-in for another vehicle. Financing could also be a great option if you'd like to keep the same car long-term or if you want the freedom to customize your vehicle.