Lease or Buy a Car: What’s the Difference?When you lease a vehicle, you pay to drive it for a certain length of time. The average lease is 24 or 36 months, although you can find even longer leases.1 Restrictions apply to how many miles you can drive and modifications that you may wish to make to it. Various fees will apply.
Once your lease period ends, you have the option to return the vehicle to the dealer or purchase it at a predetermined amount, as defined in the lease contract.
When you buy a car, you immediately take title to it. You own it outright if you pay for it with cash or after a loan is paid off if you finance your purchase. You maintain control over all aspects of the vehicle and ultimately can keep it, trade it in, sell it, or give it away.
Lease payments are generally lower than the monthly loan payments for a new vehicle. They depend on these factors:
- Sale price: This is negotiated with the dealer, just like with a vehicle purchase.
- Length of the lease: This is the number of months that you agree to lease the car.
- Expected mileage: The lease sets the maximum number of miles that you can drive the car each year. Most leases come with the choice of a 12,000- or 15,000-mile annual allotment.2 The monthly payment will increase slightly if you go for the higher yearly mileage. If you exceed the mileage limit in the contract, then you will be expected to pay the dealer for every extra mile at the end of the lease.1
- Residual value: This is the vehicle’s value at the end of the lease, with its depreciation figured in. If you decide to purchase the vehicle once the lease expires, this is the amount that you will pay.
- Rent charge: This fee is shown as a dollar figure rather than a percentage, but it is the equivalent of an interest charge.
- Taxes and fees: These are added to the lease and affect the monthly cost.
Some dealers or the manufacturers that they represent require a down payment for a lease. The more you put down, the lower your lease payment will be.