Leasing vs. Buying a Car: 10 Ways to Decide Which Option Is Right for You

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leasing vs. buying a car

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Is it better to buy or lease a car? You might think you know the answer. After all, conventional wisdom says that in the battle of leasing versus buying a car, the second option is more cost-effective.

“There’s a problem, in my opinion, that a lot of people are buying cars who would probably be better served by leasing them,” said Matt Jones, senior consumer advice editor for Edmunds. “And there are people leasing cars who might be better served buying them.”

That’s why one of the first steps to buy a car is to figure out whether you should buy a car at all. Here are some key considerations to decide whether it’s wiser to lease or buy a car.

Leasing vs. buying a car: 5 signs you should lease

1. You want to drive the latest and greatest

If you’re weighing leasing versus buying a car and know you’d prefer to drive a car less than three years old, consider leasing.

Most car leases last three years. When your lease ends, you can trade in your car and easily trade up for a newer model or a different car altogether.

So if you find yourself itching to trade in your car after a year or two, leasing can be a smart way to get the new wheels you want.

Such people should “absolutely not buy a car,” said Jones. “They should lease a car because it’s going to save them a lot of money and make them less subject to being upside-down” — or owing more on the car loan than the car is worth.

You might prefer a new car because it’s reliable and you hate dealing with maintenance hassles. If you opt for three-year leases, your major repairs are almost always covered under warranty.

Perhaps you’re a business professional or a cool kid with an image to maintain. “There’s a group of people here who, no matter what, they want to show the world that they’ve got a couple bucks in their pocket — whether it’s for their work or their social circle,” Jones said.

Whatever the reason you prefer a new car, if you’re going to be switching cars every few years, a lease is the more cost-effective option.

2. You’re looking to lower upfront and monthly costs

Another sign leasing could be the right choice for you is “if you don’t have a lot of money or you don’t want to spend a lot of money on a car,” according to Jones.

You’ll face some initial costs with a lease, but they’ll be significantly lower than the upfront costs of buying a similar car. Expect a few limited charges like sales taxes and a deposit.

A cost comparison by Edmunds for an average midsize sedan, for example, puts a lessee’s drive-off fees at $1,154. The average down payment to buy a similar car is $4,105 — nearly $3,000 more.

It’s not just upfront costs that are lower, either. Monthly costs also are lower with a lease compared to auto loan payments for the same car. The average midsize sedan costs $295 a month to lease, according to Edmunds’ analysis. The same car has an average monthly loan payment of $400.

Recent figures from Experian put the average lease on a brand-new car a bit higher: $414, $92 less than the $506 average auto loan payment.

3. You want predictable maintenance costs

“If you want to limit your costs and keep them predictable, a lease can give you that,” Jones said.

Common advice is to lease a vehicle for three years, the length of a typical warranty for a new car. This warranty will cover major repairs and mechanical issues.

“Then you don’t have to worry about things that go wrong, which are generally going to be covered under that lease warranty,” said Jones.

You’ll still have some maintenance costs, such as oil changes and tire rotations, but those fees are both predictable and affordable. If you can’t afford to fit surprise repair costs into your budget, this benefit can be huge.

4. You have great credit

Whether you plan to lease or buy a car, your credit will matter. However, if you’re counting on leasing your way to lower monthly car payments, you’ll need a solid credit history.

What’s a good credit score to lease a car? You’ll get the best rates with a score of 740 or higher, and most leasing offices will require a score of at least 680 for approval. If your credit score falls below that number but is above 620, you might face rejection or higher costs if you’re approved for a lease.

5. You want to keep your options open

Lastly, you’ll have more flexibility when leasing versus buying.

“I recommend leasing for people who are saying, ‘Hey, I don’t know exactly what my world is going to look like in three years,’” Jones said. You can “leave just a little bit of flexibility by going with a lease, in case something happens.”

For example, your transportation needs might change drastically in the near future. Jones gave an example of a recently married couple who bought a four-passenger car and then got pregnant. Suddenly, their car wasn’t cutting it, and they needed a vehicle with more space to match their expanding family.

If they’d opted for a lease, switching out cars would’ve been an easier and less costly process than trading in the car they owned for a bigger model.

On the other hand, if you fall in love with your leased car, you can turn your lease into a purchase.

“But you can’t do it the other way around,” Jones pointed out. “If you purchase a car and all of the sudden say, ‘Oh my gosh, my $400 payment is really heavy — can I make it $200?’ That’s not going to happen.”

Lease or buy a car: 5 reasons to buy

1. You plan to keep your car for 5 or more years

Car buyers are holding on to their cars longer, according to a report from automotive research firm IHS Markit. Drivers own new models for an average of 79 months (about 6.6 years) and keep used cars for 66 months (5.5 years).

If you’re the type of person who likes to hold on to your car purchases for a while, owning could be a smart choice for you.

“If a person buys a car [and] pays it off after the average loan term of six years, theoretically you’ll have five years of payment-free ownership,” Jones said. “That’s the promised land — having a car you don’t have to pay for.”

Revisiting Edmunds’ cost comparison, here’s how the costs break down over six years:

Car option Total cost over six years
Leasing over six years with two three-year leases $23,476
Buying a new car after paying off a five-year loan, with one year payment-free (after deducting current auto equity) $18,417
Buying a used car after paying off a five-year loan, with one year payment-free (after deducting current auto equity) $15,570

When you combine the auto equity accrued with payment-free years, buying is almost always the more cost-effective choice in the long term.

2. You can afford to sink some cash into your car

Buying a car requires more cash on hand.

You’ll typically need to make a down payment of 10 to 20 percent, for instance. On the average new car price of $34,861, per Kelley Blue Book’s latest report, a typical down payment can easily top $7,000.

Then there are the monthly loan payments, which average $506, per Experian.

If you can afford these costs, buying a car can save you more in the long term compared to leasing. Opt to buy a used car, and the savings scales will tip even further in your favor. Just make sure you choose a well-maintained, quality car and consider getting it inspected before purchase to avoid ending up with a lemon.

Shelling out more now might feel spendy, but it will match the value and use you can expect from the car.

3. You want your payments to build auto equity

Another important fact to remember is that while monthly auto loan payments for a car you’ve bought likely will be higher than lease payments, those costs are building equity in your car. At the end of your payments, you’ll own your car.

A five-year-old car will depreciate 63 percent, on average, so you’ll be able to get about 40 percent of its MSRP. After paying a five-year car loan for a $25,000 car, for example, you’ll have no more car payments — plus an asset worth $9,250.

However, you also run the risk that your car’s value will depreciate faster than you pay off the loan. If that happens, you’re “underwater” or “upside-down” on your car loan. Putting down a down payment of 20 to 30 percent can prevent this outcome, and gap insurance provides further protection.

The bottom line: Lessees will never get any of their monthly payments back. But car buyers can sell a car after paying off a loan and get a portion of their money back.

4. You can handle (and save for) car maintenance and repairs

Of course, owning a car comes with costs — even when you own it outright.

“You have to consider, what is your tolerance for dealing with the downsides of owning a car?” Jones said.

You’ll likely own your car past the warranty expiry — at which point you’re responsible for paying for repairs and tuneups. And older cars might need more repairs.

“It doesn’t matter how good the car is; every car will need some maintenance at that point,” Jones added.

Car owners willing to deal with ongoing maintenance costs and hassles, however, will reap the rewards. Once you own your car and are payment-free, maintenance and repairs will be your only direct vehicle costs. And “the maintenance cost will invariably be less than a lease payment,” Jones said.

“With a $200 lease payment, that’s $2,400 over the course of a year,” he continued. “Most people will not put $2,400 … of maintenance into their car in one year. So in the long run, it actually works out being cheaper.”

As a car owner, you can (and should) save a bit each month toward paying for car repairs and maintenance. If you can bake these costs into your budget or use your emergency fund to cover them, it’ll soften the impact.

5. You’re rough on your vehicles

When it comes to leasing versus buying a car, buying has one more advantage: You won’t get charged for driving your car too much or for every ding, scratch, or spill.

With a lease, you’ll face a hard limit on your mileage, usually 36,000 over three years. When the lease is up, you’ll pay an extra $.15 to $.25 for every mile over that limit on your lease. You’ll stay under that limit with a daily commute of 46 miles or less round trip.

However, if you have a longer commute or like to take weekend road trips, you easily could rack up more than 36,000 miles in a year. If that sounds more like your lifestyle, buying might be the better choice.

Lessees also will be charged for any damage beyond “normal wear and tear.” Expect to pay extra for stained or soiled seats and interiors, fixing dings or dents, and even replacing tires. If you’re accident-prone or tend to drive on rough roads, you might prefer to own your car so you can pay for these fixes on your own terms.

So when you consider leasing versus buying a car, what’s the right answer? Only you can know for sure, and it will come down to which option offers you the most value.

While buying a car can be a more cost-effective long-term option, leasing offers convenience and simplicity. As you consider the value you can get and how each option might fit into your lifestyle, you’ll arrive at the best choice for you.

Interested in refinancing student loans?

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.

2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.

Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.

Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.

Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.

3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:Fixed rates from 3.899% APR to 7.804% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.470% APR assumes the current index rate derived from the 1-month LIBOR of 2.08% plus 0.64% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.

5 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of October 1, 2018, the one-month LIBOR rate is 2.22%. Variable interest rates range from 2.72%-8.32% (2.72%-8.32% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Estimated average savings amount is based on 14,659 Education Refinance Loan customers who saved on loans between August 1, 2017 and July 31, 2018. The calculation is derived by averaging monthly savings across Education Refinance Loan customers whose payment amounts decreased after refinancing, calculated by taking the monthly payment prior to refinancing minus the monthly payment after refinancing. We excluded monthly savings from customers that exceeded $4,375 and were lower than $20 to minimize risk of data error skewing the savings amounts. Savings will vary based on interest rates, balances and remaining repayment term of loans to be refinanced. Borrower’s overall repayment amount may be higher than the loans they are refinancing even if monthly payments are lower.

2.47% – 6.99%3Undergrad
& Graduate
Visit SoFi
2.47% – 5.87%1Undergrad
& Graduate
Visit Earnest
2.47% – 8.03%4Undergrad
& Graduate
Visit Lendkey
2.95% – 6.37%2Undergrad
& Graduate
Visit Laurel Road
2.48% – 6.25%5Undergrad
& Graduate
Visit CommonBond
2.72% – 8.32%6Undergrad
& Graduate
Visit Citizens
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Published in Big Money Decisions,