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Should You Buy or Lease Your Next Car?

Tools & CalculatorsIf you need a new car, you typically have a decision to make: leasing vs. buying. This decision often comes down to your specific financial situation and, to a lesser extent, your personal desire. When you want to make an informed financial decision, you should consider using a car leasing vs. car buying calculator.

Whatever choice you make, your credit scores will help determine how much you'll pay for your new car. If you're financing a car purchase, the interest rate you pay will depend in large part on your credit score; the higher your score, the lower your interest rate, and vice versa.

Similarly, if you lease your new car, the leasing company will check your credit report and score to weigh your risk of defaulting on the lease. (Leasing a car is more similar to buying a car than to renting one, because you're making a long-term financial commitment. Beyond verifying the existence of a credit card account open in your name, rental companies tend not to investigate your credit very deeply.)

Beyond that, your payment history on your car loan or your leasing agreement will affect your credit scores. Maintaining a record of on-time payments won't hurt, but if you make delinquent loan or leasing payments — or skip one (or more) altogether — your credit scores will suffer.

There are a variety of benefits and drawbacks that should factor into your decision, some of which aren't included in the car leasing vs. car buying calculator fields:

  • Short-term costs. Monthly lease payments are much lower than monthly car-loan payments for the same car over the same contract time-span, since you're agreeing to return a leased car after a certain amount of time rather than building toward taking full ownership of it.

  • Long-term ownership. Once you pay off an auto loan, you own the car. At the end of a lease agreement, you don't. You can usually buy the car once the lease runs out, but you'll still owe the entire portion of the depreciated car value that wasn't paid off during the lease period. The cost of leasing and then buying the car is almost always much higher than the cost of buying the car upfront.

  • Gap and other insurance. You'll need to purchase car insurance whether you lease or buy your car. "Gap insurance," however, is car insurance that covers the difference between the car's current value and how much is still owed on its auto loan. This coverage is automatically included in virtually every lease agreement, which, if the car is totaled, protects both the lease company (which typically finances its car purchases through loans) and the person leasing the car. If you finance a car with a low down payment (or no down payment at all), your lender may require you to purchase gap coverage, but that's not always the case. If you choose not to obtain gap coverage as a buyer with an auto loan, you'll still have to pay off the loan, even if the car is wrecked beyond repair. Either way, though, gap coverage should enter into your thought process when making your leasing vs. buying decision.

  • Maintenance costs. Even with an extended warranty (which typically expire before the car loan is paid off), you'll still need to make make out-of-pocket payments to maintain a purchased car's performance. If you lease a car, the leasing company typically pays for all maintenance costs, since they own the car and want to ensure that it will maintain its resale value at the end of the lease.

  • Personal preference. Some people like to maintain a cutting-edge lifestyle, outfitted with the latest fashions, gadgets, and product lines. Others find comfort in familiar surroundings and long-term connections to their most-used possessions. If you wouldn't be caught dead in last year's model, leasing may be for you. If you're still driving the first car you bought fifteen years ago, you might want to buy your next car.

Deciding the leasing vs. buying question can require a great deal of thought, including a firm understanding of the different costs involved in each option. FreeScore's car buying vs. car leasing calculator below can help you determine which option makes the best sense for you financially.

 

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