Auto Lease vs. Loan: Which Is Best for You?

Statistics suggest that more people are leasing now than ever. As car prices increase and lease rates decrease, Americans (and millennials in particular) are opting to take on an auto lease rather than taking out a car loan. Auto leasing is a valid choice for some but may be the more expensive option for others. Before you settle on one option, consider the benefits and drawbacks as well as the overall costs of each.

Comparison of leasing and loaning

Payment structure and finance charges

Whether you take out a loan on a vehicle or opt to lease, your payments are based on the price of the vehicle. On a vehicle loan, you make monthly payments on the full price of the vehicle. As an example, a $24,000 car financed over a 36-month loan term at 2.25% APR would cost you $690.04 per month.*

With a lease, the vehicle is considered an asset, which reduces over time. Rather than paying on the full value of the vehicle, you pay on its depreciation (the amount of vehicle value you use up during the lease term). The dealership calculates your lease payment by determining the current value of the vehicle and subtracting the value it will likely have when the lease term ends (residual value). For example, the same $24,000 car mentioned above financed over a 36-month loan term at 2.25% APR, with a likely $6,000 residual value after a three-year lease (i.e., $18,000 as the starting cost), would cost $517.53 per month.*

Finance charges are the interest charges and other fees that come with borrowing money. Interest is the largest of these charges and both auto buyers and leasers must pay them. On a loan, interest is assessed on the entire price of the car and paid out over the term of the loan. With a lease agreement, you pay interest on the depreciation only.

It’s easy to assume that leasing is less expensive because the payments are lower. However, once you’ve paid off a car loan, you own the vehicle free and clear (which means you don’t have to make payments any longer) and you have equity in an asset that you can sell to make back a portion of your investment. Leases are different. You never “pay it off,” unless you decide to buy. If you do decide to purchase the vehicle, you will have to pay taxes and interest on the balance, which can cost more than a traditional auto loan would have cost.

*The examples above are for illustrative purposes only and do not include tax, title, or other fees that may be associated with purchasing or leasing a vehicle.

So which is the best option for you? leasing or buying?

If you’re still not certain which option is best for you, here is a slightly different way to think about it.

You may want to lease your next vehicle if you…

• Have a low monthly cash flow and can’t afford the higher loan payments
• Don’t put a lot of miles on your vehicle
• Don’t need or want to modify or personalize your vehicle
• Don’t ride rough and will therefore return the car without any undue wear and tear
• Only need the car for a short period of time (for example, you’re moving temporarily for work or visiting a foreign country)

You may want to finance your next vehicle with a loan if you…

• Have adequate cash flow
• Tend to drive a lot for work or fun
• Use your vehicle to tote small children or animals, which could cause stains or other damage to the interior
• Would like to build equity in your vehicle for future resale

One last thing to keep in mind is your credit score. The lower your credit score is, the more you will pay in interest charges and the higher your monthly payment will be, regardless of whether you lease or buy. Take the time to check your credit score and clean up any inaccuracies before shopping for a vehicle.