Home > Auto Loans > Leasing or Buying a New Car: What’s Right for You?

Comments 0 Comments

If you’re looking to buy a new car, the salesperson you work with may suggest you lease the vehicle, rather than financing it with a loan. Leasing is a worthwhile consideration when you’re browsing lots full of new cars, but you want to make sure you know the differences between your choices before you commit.

Here are three major aspects of new-car financing to consider before choosing a loan or a lease.

1. Look Beyond Monthly Payments

It’s easy to make decisions based on your monthly budget, but that’s not always the right way to go. As far as monthly expenses, a lease is probably going to be the cheaper option: loan payments among the most commonly leased cars are often much higher than the lease payments for the same vehicle. For example, the average loan payment for a Honda Civic, the most commonly leased new car, was $347 a month, while a lease cost $251 a month, according to first quarter data from Experian Automotive. Several popular cars had an average difference of more than $100 between monthly lease and loan payments.

But there’s more to cost than just the monthly payment. Money will always be a strong factor in the decision; you just have to make sure you’re considering all of it.

“I think the biggest mistake people tend to make when getting a loan is negotiating the monthly payment instead of negotiating the price of the car and looking at the loan rates,” said Melinda Zabritski, senior director of Experian Automotive.

Driving over your lease’s mileage limit results in fees that could wipe out any savings you took from the lower monthly payment. Some leases include maintenance that you may otherwise have to cover on your own if you buy the car. With a car loan, you may be able to finance 100% of the cost, while a lease may require you to put down money upfront.

Every individual, vehicle and financing plan is different, so make sure you take in the big picture before deciding what gives you the most value for your money.

2. Consider How You’ll Use the Car

Some people like driving their cars until they fall apart. Others just want a comfortable vehicle to drive around town and are happy to ditch it after a few years. The first consumer is better suited to buy, while a lease may make more sense for the second kind of person.

When either sort of person hits the car lot, he or she needs to have an accurate idea of their driving habits.

“You really have to know your driving patterns,” Zabritski said. “Does a lease truly fit your lifestyle?”

You need to know how many miles you drive a year so you can assess whether or not a lease is realistic for you: A frequent road-tripper could end up with a serious bill at the end of the lease.

Leasing also opens up a lot of options to drivers.

“I really encourage a lot of my friends to consider a lease,” said Dinos Constantine, chief operating officer of Holler-Classic Automotive Group in central Florida. “You may wish to consider a certain vehicle, but you may not be fully in love. You may see something on the lot you want to try. Leasing gives you that exit. You always have the option of buying out that vehicle.”

By “exit,” he means the option to move on to another car at the end of your lease or buy the car if you don’t want to part with it.

Of course, what kind of financial decision would buying a car be if you didn’t have to think about taxes? If you heavily use your car for business purposes, you may want to consider leasing, said Gail Rosen, a certified public accountant in New Jersey.

“There is a definite tax advantage of leasing over buying a car,” she said, “especially the more luxurious — expensive — the car is.”

The loophole depends on the cost and weight of the vehicle, but if you use your car for business, you should look into the details. You will potentially be able to write off much more of your payments than if you were making loan payments.

3. Read the Fine Print

Pay close attention to your lease agreement, because that fantastically low monthly payment may be tied to a very low mileage allowance. You also want to be aware of penalties for turning in the car early and your responsibility for maintenance.

“You’re going to end up paying a lot more at the conclusion of that lease than you would have if you set it up properly and just paid a little bit more per month,” Constantine said.

This goes back to the idea that you need to be prepared before car shopping. Not only should you know your driving habits, but you also need to know your credit standing. Those who leased the most common vehicles often had a lower credit score than people who took out loans for the same car, but leasing is overwhelmingly considered a product for the credit elite.

Even if you’re not thinking of leasing, you should try to walk into the car salesperson’s office with the best credit standing possible, so you have better chances of getting approved and decent loan rates. The more prepared you are, the better, so it helps to track your credit score well in advance of car shopping. If you want to monitor and improve your credit standing, you can get your credit data for free through Credit.com, which allows you to track your progress from month to month.

More on Auto Loans:

Image: Viktor Čáp

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team