When shopping for a new car, there are multiple factors you need to consider. Determining the right financing option is one of them.

Leasing a car and getting an auto loan both have advantages and disadvantages. Considering your circumstances and needs will help you make an informed financial decision. It’s also important to understand how leasing a car differs from getting a loan, what fees are involved and how to get auto insurance.

Car Sales and Leases Statistics in the United States

 

Knowing important facts and statistics about car sales and leases in the U.S. can help you better understand leasing and car loans.

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The country recorded 3,326,000 new passenger car sales and leases in 2021. Of these, 793,000 were leases and 2,533,000 were car sales.

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The average cost of monthly lease payment as of the second quarter of 2022 was $540. In comparison, the average loan payment for a new car was $667 per month. That’s a $127 difference monthly.

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The Honda Civic is the most leased model in the country, with a 4.5% market share. It’s followed by the Honda CR-V (2.8%), Toyota RAV4 (2.7%), Ram 1500 (2.3%), Honda Accord (2.3%), Chevrolet Equinox (2.2%), Ford F-150 (2.2%), Jeep Grand Cherokee (2.1%), Ford Explorer (1.9%) and Toyota Tacoma (1.8%).


Leasing vs. Buying: Learn the Major Differences

Buying means to purchase a car and acquire ownership by paying in lump sum or installments. On the other hand, leasing refers to an agreement that allows a person to use the lessor’s vehicle for a certain period in exchange for periodic payments.

Determining whether you should lease or buy a car requires understanding your options. Take some time to research and learn the differences between the two.

Below are some of the major differences between leasing and owning a car that you need to:

Factor
Leasing a Car
Buying a Car

Upfront costs

This is the amount you need to pay to gain the right to use the car. Upfront costs tend to be lower for car leases.

This is the cost of owning the car. It’s typically higher than car leases. Sellers may also require a hefty down payment.

Monthly payments

Payments for car leases are typically lower because you only pay to use the car. However, there may be high monthly finance charges.

Some buyers choose to take out a loan to finance a car purchase. This comes with monthly payments, which are typically higher than lease payments.

Maintenance

Typically, leased vehicles are under maintenance contracts. You’re only charged for routine maintenance, such as oil changes and tire rotations.

Buying a car makes you the owner of the vehicle. That means you’ll be responsible for all maintenance requirements and fees.

Wear and tear

The lessee ensures that the car remains in good shape. The lessor may charge extra for excessive wear and tear.

Wear and tear won’t have any effect on your monthly payments. However, it can lower the overall value of the vehicle.

Use or mileage

Car leases have mileage limits, typically around 10,000­–12,000 miles annually. Extra charges may apply for every mile over the limit.

There’s no mileage limit since you own the car. However, excessive mileage impacts the car’s resale or trade-in value.

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Is Leasing a Car a Good Idea?

Leasing a car simply means renting a vehicle from a dealership for a certain period and mileage limit. You gain the right to drive the vehicle in exchange for monthly lease payments. Although this option can be a good idea, it’s not always ideal.

Your circumstances will determine whether you should lease a car or not. Make sure you consider the actual cost of leasing a car, its pros and cons, when it can be the best option and how to get insurance.

True Costs of Leasing a Car

Monthly lease payments cost an average of $540 in the second quarter of 2022, according to Experian . Actual costs may vary depending on the vehicle model, term and mileage limit. There are also other fees the lessee should pay, such as acquisition fees, initial payment and security deposit.

The table below enumerates the most common fees and what they cover:

Type of Fee
What It Pays For

Acquisition fee

The acquisition fee, also known as administrative, origination or bank fee, is the amount you need to pay the leasing company to establish the lease agreement. It typically ranges from a few hundred to a thousand dollars. Depending on the agreement, this can be paid upfront with the down payment or added to the monthly payments.

First payment

A payment for the first month is typically required before the car is released to the lessee. The amount depends on the vehicle, your location and the dealer.

Security deposit

Putting down a security deposit is typically necessary. This usually equals a month’s payment and will cover any damages that may occur to the vehicle.

Disposition fee

At the end of the lease, the lessee has the option to purchase or return the car. You’ll be charged a disposition fee if you choose to return it. It’s usually a few hundred dollars.

Sales tax

Vehicle leases are typically charged with a sales tax. The cost depends on state regulations.

Advantages and Disadvantages

Weighing the pros and cons of leasing a car is an important step you need to take to make sure this is the best option for you. For instance, leasing may come with lower monthly costs. However, there are more restrictions. Consider your needs and determine if leasing benefits outweigh the drawbacks.

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ADVANTAGES
  • Lower monthly costs: Instead of paying for the total cost of the vehicle, you’ll only pay for the right to use the car.
  • Worry-free maintenance: You’re likely to be responsible for routine maintenance only. Additionally, you may enjoy warranty protection benefits.
  • Potential perks: Sales taxes for car leases tend to be lower. If you’re using the vehicle for business, you may also be entitled to possible tax deductions. You may qualify for free oil charges.
  • Easy upgrade: At the end of the lease term, you may be given the option to buy the vehicle or return it. You may also choose to lease a better vehicle.
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DISADVANTAGES
  • Additional fees: You may be charged with extra fees like documentation, excessive mileage, excessive wear and tear, disposition and security deposit.
  • No ownership: You don’t own the car you’re driving despite the monthly payments. That said, you may have a buyout option at the end of the lease term.
  • Lack of control: Car leases have mileage limits. You’re likely to be charged with a fee if you go over tap. You also can’t make changes or customization to the vehicle because you don’t own it.

When Does It Make Sense to Lease a Car?

Leasing may not be the first choice of many when thinking of getting a car. But there are certain instances when it makes the most sense. For example, ex-pats, older adults, individuals with a fixed monthly income and those who tend to change cars quickly may find leasing beneficial.

If you find yourself in any of the following situations, you may want to consider leasing.

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    You need a vehicle for short-term use

    The main point of a car lease is to have a vehicle you can use without the commitment and responsibility of being a car owner. Leasing is the better option if you plan on using the vehicle for a few years, whether for business or personal purposes.

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    You can’t cover high monthly payments

    Buying a car requires you to cover the vehicle’s full price. Even if you take out an auto loan, monthly payments can be high. If you live on a fixed monthly income and find it difficult to shoulder high expenses, consider leasing a car. A report by Experian shows that you can save an average of $127 monthly by choosing to lease over getting an auto loan.

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    You’re an older adult

    Seniors living on a fixed income and looking to drive for only a few years may find leasing a good idea. Leasing a car also allows them to take advantage of the latest safety systems and technology. Additionally, leasing requires less maintenance.

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    You’re an expatriate

    Expatriates coming to the U.S. who want to enjoy driving around without a long-term commitment may find leasing cost-effective. You can keep the car for as long as you need and easily return it after the lease expires or when you no longer need it.

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    You like changing cars quickly

    People who tend to keep a vehicle for around two–five years only may incur huge expenses due to constant purchases or trading up. If this is the case for you, consider leasing a car. After the lease term, you can switch to a newer model if you want.

How to Insure Your Leased Vehicles

Auto insurance provides financial protection against possible considerable expenses in the event of an accident. Most states require drivers to meet a minimum coverage requirement. However, some individuals who plan on leasing a vehicle may find car insurance a bit confusing.

The best car insurance will depend on specific factors, such as location, age, gender, credit score and driving history. Requirements for getting a policy may also vary depending on the state and leasing company.

Below are some common insurance requirements for leased cars.

Insurance Requirements for a Leased Car

Type of Insurance
What It Covers

Bodily injury liability insurance

This pays for the medical expenses another party may incur if the policyholder is at fault in the accident.

Property damage liability insurance

This coverage pays for damages the policyholder may cause to another party’s property.

Uninsured and underinsured motorist insurance

Getting an uninsured and underinsured insurance policy can protect you in the event of getting in an accident where the at-fault driver is uninsured or doesn’t have enough coverage. Some states may require drivers to carry this insurance.

Personal injury protection

Personal injury protection pays for medical expenses that you or your passengers may incur due to injuries sustained in a car accident. Some states require PIP coverage.

Collision coverage

Collision insurance pays for any damage to the leased car due to a collision with another vehicle or an object.

What You Need to Do When Your Lease Car Ends

At the end of the lease term, the lessee is given four options.

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    You can purchase the vehicle and finance its remaining value.

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    If you no longer need a car, you may simply return it to the dealer.

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    If you want to continue using the vehicle, you can extend your lease for a limited time.c

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    If you want to lease the current vehicle, you can opt to re-lease. This is often a cheaper option than leasing a new car.

If you decide to end the lease early, whether due to a job loss, change in income or moving to another location, you may be subject to early termination rules per your lease agreement. Here are some of the possible options for you:

    Transfer the remainder of the lease contract to another party

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    Pay off the amount stated by the lessor and sell the vehicle

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    Trade the leased car for another vehicle from a dealership

Keep in mind that early termination of a car lease may come with a fee. Make sure you discuss this with your lessor.

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Is Buying a Car a Good Idea for You?

The main benefit of buying a car is ownership. Unlike car leases, the buyer gains full vehicle ownership after completing the payments. For some, this means paying a huge lump sum upfront. Others may opt for a loan and installment plan. No matter the financing, finding the right price and car is crucial.

Additionally, it’s essential to consider all fees involved, the pros and cons, and when it makes the most sense to purchase a vehicle.

The True Cost of Buying a Car

Being a car owner comes with various expenses. Aside from the price of purchasing the vehicle, other payments are involved.

The average cost of car ownership is $9,282 per year or around $773.50 per month. Those who choose to finance their purchase through an auto loan may need to pay an extra $667 per month, according to Experian.

Below is a breakdown of the common fees car buyers need to take note of.

Type of Fee
What It Pays For

Title and registration fee

States charge a couple of hundred dollars for title and registration fees. In most cases, dealers have an agreement with state departments to give titles and registration for the cars they sell. Title and registration fees don’t go to dealers but the state.

Sales tax

Typically, states charge a sales tax for vehicle purchases. The cost may vary per state. Cities and counties may also charge sales taxes on top of the state tax.

Destination fee

The destination fee is the amount buyers need to pay to transfer the vehicle from the factory to the dealer. The automaker typically sets the amount.

Documentation fee

This refers to the cost a dealer charges for the processing of paperwork, such as the car title and registration. The cost may vary per dealer and location but typically costs a few hundred dollars. Some states impose a limit on how much dealers can charge.

Inspection and emission fee

Many states require vehicles to pass safety and emission inspection before they can be sold. Some dealerships pass this cost on to the buyer. Clarify this with your dealer to prevent unexpected expenses.

Advantages and Disadvantages

Similar to leasing, buying a car comes with advantages and disadvantages. Depending on your needs as a driver, the benefits may outweigh the drawbacks. The table below enumerates some of the major pros and cons of buying a car to help you get started.

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ADVANTAGES
  • No restrictions and full ownership: After completing the payments, you gain full ownership of the car. You can customize and modify the vehicle.
  • No extra fees: You don’t have to worry about additional fees, such as excessive wear and tear or mileage.
  • No mileage limits: You don’t have to be wary of your car mileage. There are no mileage limits you need to follow or penalties to worry about.
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DISADVANTAGES
  • Depreciation: The value of a car starts to depreciate as soon as you drive it off the lot. That means its trade-in or selling value is lower than the amount you paid.
  • Driving costs: Maintaining a car can be expensive. Aside from the purchase price, you need to pay for maintenance and repairs. You’ll also spend money on fuel and auto insurance.
  • Higher payments: Buying a car is more expensive than leasing. That’s because you’re paying for the entire cost of the car. You may be charged with interest if you take out a loan.

When Does It Make Sense to Buy a Car?

Evaluating your financial situation and specific needs is the best way to determine if buying a car makes sense. A vehicle can be an expensive purchase. It’s important to ensure that it’s the best possible solution for you.

Buying a car may be better than leasing if you see yourself in the following situations.

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    You plan on using it for a long time

    Leasing offers short-term access to a vehicle. Buying may be right for you if you plan on keeping the car for around five or more years.

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    You have special needs

    If you or a loved one is a person with a disability, you may need a car with safety features. Depending on your circumstances, vehicle modification may even be necessary. In such a case, it’s better to purchase a car.

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    You drive a lot

    If you plan on using the car often, you may want to consider buying it. That’s because car leases typically come with mileage restrictions.

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    You’re financially independent

    If your financial situation allows you to spend a small fortune on a new car or if the monthly loan payments are affordable, then buying can be a good option.

Financing Your Vehicle Using Auto Loans

Before choosing a vehicle, buyers should determine the best way to finance their purchase. Some individuals pay the full price of the car in a lump sum. This is a good idea if you can afford to pay cash upfront. Otherwise, you may need to take out an auto loan.

Here’s a simple guide to help you navigate auto loans.

1
Check your credit score

One of the most important factors lenders consider when evaluating loan applications is the credit score. Understanding the importance of your credit score can help you find the best lender and loan offer. Your credit score reflects your creditworthiness and ability to repay the loan. A higher score can help you access more loan offers. A lower score may limit your choices.

2
Shop around

Don’t settle for the first lender you find. Lenders have different loan offers, requirements and terms. Some may also offer promotional rates or discounts. Generally, getting quotes from at least three lenders can help determine how much your monthly payments will cost.

3
Learn the lending language

There are certain terms you need to familiarize yourself with if you plan on taking out an auto loan. Here are some of them:

  1. Car loan: Also called car financing, a car loan is the contract between the lender and borrower.
  2. Interest: Lenders charge interest, expressed in rates, to the money borrowed. This varies per lender and is specified in the loan agreement.
  3. Loan Term: This is the length of the loan. It’s typically expressed in months. During the loan term, the borrower makes monthly payments to the lender to repay the loan amount plus its interest.
  4. Principal: This is the loan balance. At the start of the term, the principal is equal to the total loan amount. As the borrower makes monthly payments, the principal declines.
  5. Down payment: This is the amount the borrower plans to pay toward the car purchase. Lenders consider this when calculating the loan amount.
  6. Monthly payment: This is the agreed-upon amount the borrower needs to pay throughout the loan term. Each month, the borrower pays a certain percentage of the principal plus interest.
4
Apply for an auto loan

Once you’re 100% sure that an auto loan is the right financing option, you may proceed with the application. Choose the lender that offers the best deal.

You may submit multiple applications. However, doing it in a short period of time isn’t recommended as these applications may impact your credit score.

5
Examine the offer

If your loan application gets approved, the lender will send you the loan agreement. Review this document. Read the fine print. Make sure you understand all details to avoid misunderstandings.

6
Negotiate and finalize the deal

Clarify all terms and conditions with the lender. Negotiate if necessary. Once you find the deal acceptable, you can sign the loan agreement. Depending on the lender, the loan amount may be released within a few days.

Tips on Finding the Best Auto Loan Deals

Choosing the right auto loan company can be challenging, especially for first-time borrowers. Doing your research, shopping around and knowing what factors lenders consider can help you find the best deal.

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    1. Compare rates and costs

    The best auto loan deal may vary depending on your needs and circumstances. That’s why shopping around is necessary. Compare loan offers from at least three lenders. Check the loan features, especially the annual percentage rate, monthly payment and the length of the loan.

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    1. Research loan length and loan offers

    Researching the lenders available can help you decide where to submit a loan application. Review previous and current clients to see if a lender has reasonable rates and good customer service.

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    1. Limit your applications

    Don’t submit applications to multiple lenders at once. Lenders tend to conduct a hard credit inquiry when evaluating loan applications. This credit check is recorded in your credit report and may affect your credit score. Some lenders have pre-qualification tools that borrowers can use to check if they qualify for a car loan. These tools may also allow borrowers to check potential loan amounts, payments and interest rates.

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    1. Improve your credit

    Try to improve your credit score first before applying for a loan. Generally, individuals with good to excellent credit scores have a higher chance of getting approved for a loan. They may also have better loan options.

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3 Factors to Consider When Choosing Between a Loan vs. a Lease

Choosing between an auto loan or a car lease can be a challenging experience. Knowing what factors to consider can help you determine the more appropriate option. Comparing costs is a must, but understanding your needs and financial situation is also crucial.

Below are some tips that may help you decide between the two options.

1
Consider your finances

Determine how much you can spend on monthly payments. This is one of the most critical steps you should take. You wouldn’t want to enter a commitment without proper consideration. If you’re living on a fixed income and looking for the cheapest option, leasing may be right.

2
Calculate the costs

The actual cost of leasing and buying goes beyond the initial costs. For instance, the upfront costs for a new car model may be cheap, but there are other expenses you need to take care of, like maintenance, tax and monthly payments.

3
Evaluate your needs

Another important factor to consider is how you plan on using the car. Leasing is more cost-effective if you only need it for a few years. But if you plan on using the car often, you may have to consider buying. That’s because car leases have mileage restrictions.

Leasing Lingo

There are various terms used in the car leasing industry. Below are some terms and definitions to help you better understand leasing.

Terms
Definition

Acquisition fee

A fee charged to the lessee to start a lease, which generally begins in the $400 to $500 range.

Capitalization cost

The final negotiated price of the vehicle to be leased.

Closed-end lease

In this lease, the residual value (value of the vehicle at the end of the lease) is estimated and agreed upon in advance by you and the dealer. At the end of the lease, you won't have to pay extra (or will receive a refund) if the car turns out to be worth less or more than the agreed upon price.

Depreciation

The value that a vehicle loses over time.

Disposition fee

A fee charged when you return your vehicle at the end of the lease, typically $350, that covers the dealership's cost to dispose of the vehicle.

Ask the experts:

What’s the most important factor(s) consumers should consider when deciding whether to lease a car or get a loan?

Auto Broker at HM Brown Automotive

There are three primary things to consider when considering financing or leasing a car:

  1. Monthly payment. If the payment is the same or higher on a lease purchase than on a finance purchase, it might be better to finance. If the payment is considerably less on a lease purchase, it might be better to lease. Usually, insurance and registration are about the same regardless of purchase method.
  2. Length of ownership. A particular time frame for the vehicle to be needed is an important consideration. If the consumer has a history of keeping cars for a long time and plans to keep the vehicle for a long time, then leasing would not be ideal.
  3. Type of use. If there is a particular use case for the vehicle (business or personal), that could also lead to one option being better than the other. The miles and use case could be a very important consideration.
Director of Marketing and Sales at Gunther Motor Company

The most important factors for car buyers to consider when deciding if it's better to buy or lease are how long you want to own the car, your budget, personal preferences and the miles you typically drive yearly.

Most new car leases are for three years, while financing contracts typically last five years or longer to lower the monthly payment. Looking down the road, drivers should consider whether they will need a different vehicle in three years or continue to drive their current vehicle. You can ask yourself questions: Do you expect your family to grow over the next three years? Is your commute likely to change? Do you want a sporty sedan for the next few years but know you'll want a family SUV soon? Are you happy with two rows of seats now, but know you'll need more room soon for multiple child safety seats, booster seats and friends?

When choosing between buying or leasing, your vehicle timeline is important. Essentially, how long do you want to drive your next car? If it’s three years, then leasing is the way to go. If it’s more than three years, we’d recommend financing.

Another factor to consider when choosing to lease or finance is your budget. You no longer have a car when you turn in your vehicle at the end of your lease contract. You've essentially rented a car for three years. Unless you purchase your vehicle for the predetermined price, you'll need to buy a car or start a new lease. Many drivers prefer this because leasing gives greater flexibility than buying.

When you finance a vehicle, you're making a purchase. At the end of your finance agreement, you have a car. But then, it is up to you to maintain that car and pay for repairs after warranties begin to expire.

Drivers should consider how much they drive when buying a car or leasing. Lease contracts have annual mileage limits to maintain the vehicle's resale value. If you exceed these limits, you must pay for every mile over the allotted amount when you turn in your car. We recommend financing over leasing if you rack up heavy mileage every year.

Lastly, what are your personal preferences? If you love having a new car smell at all times and enjoy the security of warranty protection, then leasing is an excellent option. Another benefit of leasing a new car every three years is you always have the latest infotainment technologies, safety features, and performance advancements.

If you prefer owning what you drive, plan to drive your next car for five to 10 years and enjoy owning your vehicle when you make your last payment, then financing is an excellent way to buy a car.

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Resources for Buying a Car

The right resources can help you better understand your options and make an informed decision about owning a car. You can find the following relevant resources to help you determine the best option for you, your budget and your circumstances.

Car Ownership

Auto Insurance

About Christopher Boston


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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.