Vehicle Loan vs. Lease: Which Makes Sense for You?

A new vehicle today probably costs more than your grandparent’s first home, according to the analysts at Kelley Blue Book. As of June 2021, the average cost of a new car in the United States is $42,258. New cars can be out of reach for many buyers, and even with long-term auto loans, it can be tough to afford one. Buyers are also finding new cars to be scarce right now due to supply chain issues. There are many factors to consider when looking for a new or pre-owned car. The process can be intimidating when considering contracts, loans, maintenance and fees for a vehicle. Perhaps the biggest decision is whether or not you want to buy or lease the vehicle. Since everyone’s situation is different, start with considering your own budget, cash flow, credit score, occupation and personal preferences. As you shop for an automobile and start doing research into leasing vs. buying, there are specific differences between the two that may make all the difference in which option you ultimately choose. Below are the most notable ways auto loans and auto leases are different.

Comparing the Cost of Leasing vs. Buying a Car

You will want to review the cost differences associated with leasing vs. buying a car, and these will be influenced by a variety of factors. For example, the amount of money you put down, the term of a loan or a lease, the interest rate you qualify for and the value of the car. If you are not sure if you should buy or lease, talk to your dealership sales representative about both purchase promotions and lease promotions and ask for the rock bottom price for both options on the same vehicle. There are pros and cons to consider when looking at an auto loan or lease, including monthly payments, total car expenses, overall use and value. Both options have their advantages and disadvantages, and deciding what's best depends on your individual needs. Here are a few things to consider before you make a decision.

Pros of a Lease:

  • Offers lower monthly payments with little or no down payments.
  • Provides the ability to drive a nicer and newer car for less money.
  • Typically comes with lower repair costs because you are under the vehicle's included factory warranty.
  • Ability to easily transition to a new car every two or three years.
  • No need to worry about the trade-in value of the car at the end of the lease.
  • Provides an option to buy the car at the end of the lease.
  • Pay less sales tax since you don’t pay the sales tax up front. You pay sales tax monthly based on the amount of your payment.

Cons of a Lease:

  • At the end of the lease, you do not own the vehicle and either have to then purchase it, or give it back to the dealer.
  • Leases are limited to a certain number of miles per year and you must pay for any excess miles above your contract amount, some as high as 20 cents per mile which could be a big shock when the lease is over.
  • Leases can have confusing contracts filled with unfamiliar terminology.
  • There is potential to pay more in the long-run for a leased car than if you bought the vehicle outright and kept it for years.
  • You are responsible for excessive wear-and-tear charges at the end of the lease.
  • It can be costly if you need to terminate a lease early.

Pros of Buying:

  • You can modify your car as you please with aftermarket products.
  • You have the potential to save money over the long term if you buy a car.
  • You can drive as much as you like. There's no excess mileage penalty.
  • You have more flexibility since you can sell the car whenever you want.
  • You can use the car as a trade-in on the next car you buy.
  • You will build equity in your vehicle to use if ever needed.
  • You have the ability to take advantage of today’s low auto loan rate environment.

Cons of Buying:

  • You might need to pay a higher down payment to avoid owing more than the car is worth.
  • You might have higher monthly car payments than a lease.
  • You could have possible trade-in or selling hassles when you decide to get your next car.
  • More of your cash will be tied up in a car, which depreciates in value.
  • You have to pay sales tax on the purchase price.

Which Option is Right for You?

When shopping for a vehicle, weigh all of your options before you commit. While leasing might be more attractive in the short-term, it’s often more expensive in the long-term. Between continuous monthly payments, mileage limits and other contractual obligations, leasing isn’t as simple as it may seem. 

Leasing is a good idea, if you’re consistently rotating through vehicles every 3 to 5 years, or if you write-off monthly expenses for your business needs. For example, if you’re a real estate agent and want to drive a newer, nicer car every couple years, then leasing might be the best option for you. If you like the idea of owning, the right vehicle could last you 10 years and become an asset you own, keeping you from an endless cycle of monthly payments later on. 
As you decide between buying or leasing a car, remember to keep these considerations in mind:

  • Planned use of the car
  • Monthly budget
  • Cash flow
  • Credit score
  • Total costs
  • Taxes
  • Fees
  • Environmental impact (gas, hybrid or electric)
  • Your personal preferences

The decision between buying and leasing a car comes down to a choice of flexibility and affordability versus long-term costs and personal preferences. If you’re short on cash to spend, want low monthly payments and hope to avoid any risk of major repairs, a lease can make sense. On the other hand, if you want long-term affordability, a wider choice of vehicles and the option to drive your vehicles for years to come, purchasing can be the best way to go. Buying a vehicle doesn’t have to be overwhelming. Of course there’s a lot to look out for but being prepared and doing your homework will help make the auto buying process a seamless experience. The feeling of purchasing your own car and driving it for the first time should feel special. SDCCU is here to help, so make sure to visit for more information on how we can make the car buying process easier for you. Happy car shopping!

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