Lease or Buy a New Car? Here’s How to Decide.

If you’ve got your eye on a new car, the mathematics of leasing versus buying one might sound very appealing:

With new car prices in the $40,000-$50,000 range… and auto loan rates around 6%-7%… buyers are paying $735 per month, on average, according to Experian.

Leasing a car gets you down to $595 per month, on average. That’s nearly $140 less per month. Because you are essentially renting a car, typically a brand-new one, you don’t actually have to pay the market value of the car. Instead, your lease payment covers the car’s expected depreciation (value lost) during the time you’ll be driving it, plus interest.

There’s a lot more to this decision than the monthly payment, though. And automotive leases can get complicated, to say the least.

Here are a few simple ways to know whether buying or leasing is the way to go. See which one sounds most like you and your situation.

When Leasing Might Be the Right Option for You

You won’t be driving your car a ton. One of the most important rules of leasing a car is that you don’t go over the mileage you’ve agreed upon in your lease — typically 10,000 to 15,000 miles per year.

Now, that’s not too restrictive given that, during the pandemic, the average American started driving only about 12,800-13,500 miles per year. If your driving patterns are back to how they were pre-pandemic, though, it’s worth noting that drivers averaged 14,263 miles in 2019, according to Kelley Blue Book.

High-mileage leases tend to be more expensive. And speaking of expensive… If you return a leased car that’s over the mileage cap, expect to pay 20 cents per mile.

So, for example, if you’ve gone 3,000 miles over the limit, expect to pay $600 for that.

Bottom line, if you’d tend to drive the car more than about 200 miles a week, leasing may not be for you.

You know you’ll want this car for a couple of years — no more, no less. Usually, your lease is an agreement to drive this car for three years (36 months) or two years (24 months). Period.

After that, you’ll switch to the latest model, knowing that automotive technology is improving rapidly, especially for electric vehicles.

You tend to be meticulous about keeping a car clean and maintained, including rotating tires.

Much like when you’re renting your home… you want your leased car to be looking “spic and span” as you’re aiming to get your security deposit back. “The good news is that many new vehicles come with some sort of free maintenance plan,” says Kelley Blue Book.

You have really good credit. Yes: Your credit score still comes into play even when you don’t need an auto loan. You will still need to put money down and pay interest, so the leasing company will still run your credit to determine those amounts. In fact, “leasing a car generally requires better credit than financing,” according to Kelley Blue Book.

Most auto leases go to people with credit scores of 660 or more, even 740 or more. “A credit score under 600 will be a very tough sell,” Kelley Blue Book concludes.

You want to switch to a cutting-edge car, like an electric vehicle, but you don’t want to pay too steep of a monthly payment.

That $735 a month for the average auto loan in 2024? Far out of reach for most of us. If you’re anything like the average American, whose median earnings were $48,068 in 2023, you’d be looking to pay more like $400-$500 a month, max.

And in exchange for a lower monthly payment now (and probably less down, too)…

You’re willing to pay some “graduation fees” later, so to speak.

Companies that lease cars are notorious for charging you these types of fees when you return your car at the end of your term:

• Disposition fee (about $350).
• Fees for excessive mileage (about 20 cents per mile over your mileage cap, as discussed earlier).
• Fees for wear and tear that exceeds ~$500. (Wear and tear less than that, the leasing company often forgives).
• Fees for tire wear if less than 3 millimeters (1/8 inch) of tire tread remains.
• Early termination fee or alteration fees, if applicable.

Relatedly, you’re mindful of staying within a budget. You can lease a car without being tempted to get in over your head by those lower monthly payments on luxury cars that you can’t afford to buy.

You plan to write off this car as a business expense. “​​Leasing also streamlines writing off your vehicle as a business expense at tax time,” Kelley Blue Book explains.

You don’t mind paying a little more to upgrade your auto insurance when you lease this car.

It’s not so much that insurance companies charge you more if they know you’re leasing instead of buying a car. It’s that the company that leases you the car will probably require a stricter insurance policy. After all, you’re driving away with a car they still own.

“In addition to comprehensive and collision, most leasing companies require you to carry liability limits of at least $100,000 per person and $300,000 per accident for bodily injury, along with $50,000 for property damage,” Bankrate reports.

The car is likely to hold its value well in the next couple of years. If you’re looking for an electric car, know that depreciation has been a problem in the EV market lately.

There are some makes of car that, in general, tend to retain value even as years go by, like Subaru, Jeep, Lexus and Ram, according to Kelley Blue Book.

This is important when you lease a car — not just when you buy one — since they’ll charge you a higher monthly payment to lease a car that’s expected to depreciate rapidly.

You’d like to take advantage of tax credits on an EV that might not otherwise be affordable to you unless you lease it. State tax credits vary, but federally, the IRS offers tax credits up to $7,500 for electric cars. Know that this may not be available if you make more than $150,000 individually (or $300,000 for the household). Also, it all goes through the leasing company, so they do get some say in how much you’ll save, too.

This all being the case, here’s what we can conclude about whether to simply buy the car outright:

When Buying Might Be the Right Option for You

You tend to put a lot of miles on a car (or don’t know how much you’ll put) and don’t want to be restrained.

You aren’t sure how long you’ll drive the car but plan to drive it indefinitely. Generally, you don’t switch up your vehicle super often. You appreciate the flexibility if after just a few months, for example, you change your mind about this car…

But it’s not a priority to always be driving something with the latest technology/features. For example, if you get a gas-powered (ICE) car today, you’ll just keep driving it for a long time, even as other people are switching to electric vehicles.

You tend to let life happen and not sweat the small stuff when it comes to keeping your car clean and maintained.

Even so, you want to build up equity that you can use to buy your next car. Or maybe there are other expenses in life that you’d like the ability to pay for by selling this car and tucking the proceeds in your piggy bank. You don’t mind paying a bit more per month in return.

You care much more about getting money at trade-in, say, five or seven years from now, and aren’t concerned if the car depreciates rapidly in the first couple years.

You have about 10% to 20% to put down on the car when you get it, but you may or may not have great credit.

You want to be frugal on your auto insurance.

The car is for personal use, not a business expense.

You like to put on after-market upgrades, like “custom tires and wheels, custom bodywork or seats, audio system modifications, or any underhood performance upgrade.” That way, you’ll avoid those pesky “alteration fees” if you leased that beautiful new Mazda, Jeep, or whatever you have your eye on.

In my house, we’re not big on customizing our cars, but buying still wins out over leasing. Although we’re interested in making the switch to EVs – without paying top dollar – ultimately the “fine print” of leasing has us saying: “Never mind.” Keep these details in mind when making your own decision to buy or lease your next car.

Sources

State of the Automotive Finance Market Q1 2024. Experian. (2024, May 30). https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/2024/experian-safm-q1-2024.pdf

What should I know about leasing versus buying a car? | Consumer Financial Protection Bureau. (2023, September 12). Consumer Financial Protection Bureau. https://www.consumerfinance.gov/ask-cfpb/what-should-i-know-about-leasing-versus-buying-a-car-en-815/

Hardesty, C. (2024, April 19). Returning a lease car: What to expect. Kelley Blue Book. https://www.kbb.com/car-advice/returning-a-lease-vehicle/

Hardesty, C. (2024, January 26). Car leasing Guide: How to lease a vehicle in 2024. Kelley Blue Book. https://www.kbb.com/car-advice/car-leasing-guide/

Robinson, D. (2023, October 3). How much car can I afford? https://www.marketwatch.com/guides/car-loans/how-much-car-can-i-afford/

Luthi, B. (2023, August 27). Is insurance on a leased car more expensive? Experian. https://www.experian.com/blogs/ask-experian/is-insurance-on-a-leased-car-more-expensive/

Heaps, R. (2024, January 8). Leasing vs. Buying an Electric Car in 2024. Kelley Blue Book. https://www.kbb.com/car-advice/lease-buy-electric-car/

Butts, D. (2024, April 5). Poor resale values of EVs threaten adoption, warn some experts. CNBC. https://www.cnbc.com/2024/04/05/poor-resale-values-of-evs-are-a-problem-for-the-industry-warn-experts.html

Betterton, R. (2024, June 12). How to lease a car. Bankrate. https://www.bankrate.com/loans/auto-loans/car-leasing-mistakes-to-avoid/

Credits for new clean vehicles purchased in 2023 or after | Internal Revenue Service. (n.d.). https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after

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