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?Here are the top 8 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
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 3.20% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 December 13, 2019, 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 12/13/2019. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on our student 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 SoFi.
3 Important Disclosures for Figure.
Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.
4 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2020. Variable interest rates may increase after consummation.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of November 8, 2019 and is subject to change.
6 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers.
7 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 1.76% effective November 10, 2019.
8 Important Disclosures for LendKey.
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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 12/019/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
|1.99% – 6.89%1||Undergrad & Graduate|
|2.31% – 7.36%2||Undergrad & Graduate|
|2.06% – 6.81%3||Undergrad & Graduate|
|2.62% – 6.12%4||Undergrad & Graduate|
|1.99% – 6.65%5||Undergrad & Graduate|
|1.99% – 7.06%6||Undergrad & Graduate|
|1.85% – 6.13%7||Undergrad & Graduate|
|1.90% – 8.59%8||Undergrad & Graduate|