When shopping for a car, it is important to understand the difference between purchasing and leasing a car. Leasing has become quite popular recently as more and more consumers are looking to drive their dream car while staying within their budget.

Purchasing a car is easy but leasing a car can sound confusing if it is not explained properly. In the last 4 years I have personally helped over 100 people lease a car.

Here’s what you need to know about leasing vs purchasing a car:

Leasing A Car

With an apartment, you lease the space for a year or so, you are responsible for damage. Using the same example, at the end of the lease, you can renew the lease or you can go to another apartment and start the process over again at another apartment complex. Leasing a car is a similar concept. You drive the vehicle for a certain period of time which usually depends on the manufacturer. During the lease, the leasee is responsible for any vehicle damage, insurance, and mileage.

Most manufacturers offer mileage limits of 10,000 – 20,000. The most common lease for non-luxury vehicles is 36-39 months and 12,000 miles per year mileage allowance. Mileage concerns are the number one reason that most consumers hesitate to lease. One common misconception is that you CAN NOT go over mileage. You actually can go over your mileage per year or per month as long as your mileage is not over the limit by the time your lease is up. Even if you do go over the mileage allowance you can still drive the car (the car doesn’t automatically shut off on you). If you go over the limit you are responsible for paying per mile. In most leases the cost is 10 cents per mile over the contracted limit. It should be noted that some brands charge a lot more and over mileage expenses can become costly. If you don’t go exceed the limit during the term of the lease, you will not pay an extra cost.

At the end of the lease you have options. You can chose to: end with the lease all together, turn in your keys and walk away, purchase the lease (typically the payment will remain around the same.)

Leasing is only offered to those who qualify. A credit score of at least 640 is suggested.

Advantages of leasing:

Leasing is advantageous for consumers who finance a car every 2-3 years and typically carry a negative balance (called negative equity) from car to car until a lender refuses to finance the negative debt.
Another advantage of leasing is you don’t have to worry about paying for maintenance such as oil changes, tires, brakes, or rotors in most cases.

Lease payments are also typically less than actual purchase payments.

When you lease, a portion of the car’s depreciation and financing costs can be deducted on your taxes. Interest on loans to buy a car, however, aren’t deductible.

You can get a new vehicle quicker without taking on negative equity.

Disadvantages of leasing:

You can get stuck in the leasing habit, monthly payments go on forever. While you can opt to convert a lease into a car note and eventually pay it off, if you continue to choose to lease you’ll always have a car payment.

You have a limited number of miles in your lease contract, typically 12,000 to 15,000 miles a year. If you drive more than that, you’ll have to pay an excess mileage penalty of 10 cents to as much as 25 cents for every additional mile. Unfortunately if you drive too little, you don’t get credited for the unused miles.

You must maintain the vehicle in good condition or you’ll have to pay excess wear-and-tear charges when you turn it in. If your kids are apt to turn the interior into a second playroom or your car’s a magnet for parking lot dents and scratches, you’ll pay more when you return the vehicle.

If you need to get out of a lease before it expires, you may be stuck with thousands of dollars in early-termination fees and penalties—all due at once. This could equal the amount it would cost had you stuck with the lease for its entire term.

You aren’t allowed to customize your vehicle in any permanent way.

Purchasing A Car

Many consumers say that leasing will not work for them simply because they will not “own” the car. I laugh at this every time because if you miss 3-4 payments on a financed auto loan, you will find out who the real owner is.

Most consumers never finish paying off an auto loan and that is how they begin to build “negative” equity often referred to as “upside down”. Negative equity occurs when an unpaid balance from a previous loan is rolled over into a new loan. So you’re not only paying for the current car loan, you’re also paying off the balance of the previous loan. If you continue to do this, eventually you’ll owe more than the car is worth. I have seen borrowers accrue so much negative equity from previous loans that they can’t get financed for a newer or different car. The best way to avoid negative equity is to put money down at purchasing and make more than your monthly payment amount whenever you can.

The best time to trade in an open auto loan (current auto loan) can vary based on contract terms, miles, interest rate, vehicle condition, and etc. In most cases, most auto loans are 60-72 months long and if that’s the case, the best time can be around 36-60 months.

Your auto loan purchase is primarily based on your credit score as well since you’re interest rate determines your monthly payments (unless you are paying in cash). A credit report with too little accounts might not get approved or result in a higher interest rate. A report with too much “negative” activity may yield the same. Know your score before you walk onto the lot. If you have less than perfect credit and have to accept a high interest initially due to your credit, build your score and consider refinancing their car in a few months or a year to get a better interest rate or lower payment overall. You can also get a joint applicant aka a co-signer, in which both your credit report and your joint applicant’s credit report is taken into consideration.

Also ask about any promotions. Some manufacturers offer low interest and first time car buyer programs but these programs also require buyers to meet qualifications.

Advantages of buying a car:

You’re free to drive as many miles as you want. (But keep in mind that higher mileage lowers the vehicle’s trade-in or resale value.)

You can sell or trade in your vehicle at any time. If necessary, money from the sale can be used to pay off any loan balance.

At the end of the loan term (typically four to five years), you have no further payments and you have built equity to help pay for your next vehicle.

You can modify or customize as you like.

Disadvantage of buying a car:

You don’t receive the same tax benefits as leasing

In most cases you are responsible for the maintenance the day you take ownership.

You can’t walk away from the car note after 3 years if you don’t have a 36 month loan term.

Bottom Line
Both options have advantages and disadvantages. It’s not about which disadvantages list is shorter, it comes down to your lifestyle and financial goals. If you are the type of person who likes to get a new car every three years, or when the body style changes, leasing might be best for you. If you own your own business and can write off the lease for tax purposes, leasing might be best for you. If you and your family are notoriously tough on cars, purchasing might be best for you. If you take frequent road trips or drive often, purchasing might be best for you.
If you have questions about buying a car, check out Tonya’s post on her lessons learned from selling cars (yes, Tonya sold cars for an entire year.)

If you have questions, feel free to leave them in the comment section below.

Calvin Russell Jr is a Certified FICO Professional, Approved Partner With Bankrate, and the CEO & Founder of GoSimplyPro Credit Consultation. GoSimplyPro Credit Consultation is a Chicago based Credit Repair Company. GoSimplyPro Credit Consultation has helped hundreds of people increase their credit scores, qualify for homes, cars, and lower interest rates with their personal, Step-By- Step Game Plans. Contact us today to learn more at 877.205.7771 or email us at info@gosimplypro.com.