Disclaimer: Upstart is not a financial advisor. The following content is for informational purposes only.
Finding your dream car is one of life’s most exciting experiences, no matter how many cars you’ve driven. Deciding whether to lease it or buy it makes it a little more complicated.
Many people have a strong opinion about “leasing vs. buying a car.” Some believe leasing is a waste of money and would rather finance a vehicle. Others love the flexibility and wouldn’t trade their car lease for anything—except a lease on a newer model, perhaps.
Buying a car isn’t necessarily better than leasing. But depending on your financial circumstances and goals, it may be more cost-effective to buy a car.
In this guide, we’ll break down the differences between leasing a car and buying or financing one. We’ll discuss the advantages and disadvantages of both options so you can make the best decision for your financial circumstances.
How does leasing a car work?
When you lease a car, you rent the vehicle for a predetermined period. Most auto leases last 2 to 4 years, but you may be able to negotiate the terms with your dealership.
Once you sign the lease, you’ll begin making monthly rental payments on your car. At the end of the lease, you have the option to buy out your car lease or rent a new vehicle.
How to lease a car
Generally, you begin the leasing process by choosing the vehicle you want to lease and negotiating an agreement with the dealership.
Once you agree on the cost and length of your lease, the dealership will put together a lease contract for you to sign. Lease agreements usually include the monthly payment, the length of the lease, and other factors, like:
- Your down payment
- The car’s current worth
- The car’s predicted market value at the end of the lease
- The fees you’ll pay at the beginning and end of the lease
- How many miles you can put on the car each year
Your lease agreement will also address issues like maintenance, wear and tear, and late payment fees. After you sign the lease, you’re free to use the car however you want. Then, you’ll return the car to your leasing company at the end of the term.
What does it mean to finance a car?
When you finance a car, you use an auto loan from a bank or lending company to buy the vehicle. Then, you make monthly payments on the car until you reach the payoff date or trade the vehicle in.
Financing a vehicle can make buying a car more affordable. Instead of paying for your car outright with cash, you can break the purchase price into budget-friendly monthly installments.
The cost of your monthly payment will depend on several factors, such as:
- The purchase price of your vehicle
- The amount of your down payment
- Your credit score and credit history
- The length of your loan
- Your interest rate and annual percentage rate (APR)
Longer-term auto loans will typically come with lower monthly payments. However, you may end up paying more in interest over time.
You may also pay more in interest if you have a less-than-stellar credit score. Auto loan companies look at your credit score to determine how likely you are to default on a loan. If you’re building your credit, you could get approved for a loan with a high interest rate.
That doesn’t mean you’re stuck with a long-term or expensive auto loan forever, though. You may be able to refinance your car loan through a lending platform like Upstart. By refinancing your auto loan, you could get a lower interest rate, save more on your monthly payment, and maybe even pay off your car loan early.
We break the process into 8 easy steps in our guide to auto refinancing. Refer to that guide if you need to get out of an upside-down car loan or want to pay your car loan off faster.
The main difference between leasing and financing a car
Simply put, the main difference between leasing and financing a car is that leasing is essentially a long-term rental.
Leasing typically costs less per month because you’re paying for the car’s depreciation, not its total cost. As a result, you may be able to afford a newer, more upgraded car by leasing instead of financing. But, you won’t own the car at the end of your lease.
These factors and others may determine the type of car you choose and the monthly payments you’ll face. For further comparison, consider the advantages and disadvantages of buying vs. leasing a car below.
Advantages of leasing
Disadvantages of leasing
Advantages of buying
Disadvantages of buying
Should I lease or buy a car? Other factors to consider
Still not sure if buying or leasing a car is right for you? Leasing may cost you less per month, but you’ll make monthly payments as long as you lease. By purchasing instead, you could pay off a financed vehicle, own it outright, and make no more payments after you reach your loan payoff date.
There’s more to consider than your monthly payments, though. Let’s look at a few important factors that could help you decide whether to lease or finance a car.
Is it easier to lease or buy a car?
Leasing may be easier—and somewhat more affordable—if you’ve got a solid credit history. However, if you’re new to credit or rebuilding your score, you may have a better chance of qualifying for an auto loan than a lease.
Tax benefits of leasing a car vs. buying a car
Do you plan to use your car for business purposes? If so, you may want to consider leasing. Leasing allows you to deduct at least part of your monthly lease payment from your federal tax return. For instance, if you use your car for work 25% of the time, you can deduct 25% of your payment from your taxes.
Insurance for leased car vs. bought car
When you finance a car, you can decide how much car insurance coverage you want after meeting the legal minimum.
In contrast, most leasing companies require you to have comprehensive coverage, plus collision coverage. Comprehensive insurance will ensure you’re covered if you get into an accident, but it will also cost you more each month.
The bottom line: Is it better to lease or buy a car?
Ultimately, deciding to buy or lease a car depends on your financial situation, lifestyle, and long-term goals. If the ease of upgrading and minimal maintenance costs appeal to you, then leasing may be the best bet. If you’d rather put your money toward building equity, you may prefer to finance your vehicle.
With all this in mind, take some time to decide which option works best for you. No matter if you choose to buy or lease, you’ll enjoy the same result: a safe, affordable vehicle that keeps you moving forward to a better financial future.
Car refinance loans not available in IA, MD, NV, or WV.