Is It Better to Lease or Buy a Car?

If you’re in the market for a new car, you may wonder “is leasing better than buying?”

The choice between buying and leasing a car comes down to your financial situation, credit, and long-term plans. Monthly lease payments are usually lower, but you have nothing to show for all those payments at the end of a lease. On the other hand, you might pay more per month for a car loan, but at the end of the loan term, you own the car and can drive it payment-free for years to come.

So, is it better to lease or buy a car? First, let's look at what you need to know about leasing versus buying.

Leasing vs. buying a car

To figure out if car leasing is better than buying, you first need to understand exactly what a car lease entails.

What does it mean to lease a car?

Leasing a car is a lot like a long-term rental. A lease is an agreement between the lessor (the company that owns the car) and the lessee (the person who pays to borrow the car). You're allowed to drive the car for an agreed amount of time and miles. Your monthly lease payments are usually lower than that would be to buy the same car because they’re based on its usage rather than the full purchase price of the vehicle.

How does leasing a car work?

When you lease a car, you usually have to make an upfront payment, plus monthly payments. You get to use the car for several years, and at the end of your lease, you return the car to the lessor. At that point, you can decide to sign a new lease, buy a car, or go without a car.

Most leases last two to four years and limit the number of miles you're allowed to put on the car each year — usually around 12,000 per year, although you can get a high mileage lease if you need one.^[1] If you go over the mileage limit included in your lease agreement, you’ll have to pay an excess mileage fee.

Unless you choose to buy the car at the end of the lease — which involves paying the price outlined in the lease agreement — you never own a leased vehicle. This differs from a car loan because you actually own the car at the end of a loan and can sell it, trade it in for a different vehicle, or continue driving it without a monthly car payment.

Is it cheaper to lease a car than buy one?

Whether leasing is cheaper than buying depends on how you look at it. The monthly payments on a lease are usually lower than those on a car loan on the same vehicle. That's because your lease payment is calculated based on the vehicle's depreciation, or the difference between the car’s current value and its residual value, which is its expected value at the end of the lease (plus interest and fees).

When you buy a car, you pay the full market value of the vehicle, plus interest. That makes loan payments more expensive.

To see the difference between lease and loan payments for yourself, check out Edmunds' Lease vs. Buy Calculator.

If you plan on getting a new car in three years whether you lease or buy, then car leasing is clearly a better deal because you'll save $369 per month.

However, what if you plan on buying the vehicle and driving it for ten years? You would pay $775 per month in the first three years, but you wouldn't have a car payment at all in the last seven years. That could make buying less expensive than turning your leased car in and signing a new lease at the end of the three-year lease period.

Should you lease or buy a car with bad credit?

A bad credit score will make buying or leasing more difficult. When you apply for a car loan or lease, the lender will run your credit. If you have bad credit, your application may be denied. If you are approved, the lender or lessor will charge a higher interest rate.

Still, buying a car might be a bit easier than leasing for people with bad credit. Auto loans use the car you're buying as collateral. If you default on the loan, the lender repossesses the car to recoup their losses. This means you're less likely to be denied an auto loan, even if you have bad credit.

Leasing is different. If you stop making lease payments, the dealer still owns the car, just like they always have. All they're left with is a car that's less valuable than it was when the lease began. For that reason, leasing companies are less likely to lease to people with bad credit.

If you have bad credit, fortunately, there are credit builder programs or credit builder card options that you can try to help you increase your score.

What credit score do I need to lease a car?

There's no minimum credit score to qualify for a lease — different dealers and leasing companies set their own minimums. However, according to Experian, the average credit score of people leasing a car is 729^[2], which is in the "prime" category.

For auto loans, the average score depends on whether you’re buying new or used. For new car buyers, the average credit score is 734. For used cars, it’s 663.^[3] So if credit problems are making it hard to get approved for a lease, you may have an easier time buying a used car.

Will leasing or buying a car be better for my credit score?

If you're working on building or rebuilding your credit, you may wonder whether leasing or buying a car is better for your credit. There's actually not much difference from a credit scoring standpoint.

Will a car lease show up on my credit report?

Both car leases and loans are reported as installment loans on your credit report, so as long as you make on-time payments, your positive payment history will help boost your credit score.

The one difference between leases and loans is in the amount of debt that appears on your credit report. When you purchase a car, the entire amount financed shows up on your credit report.

If you take out a $30,000 car loan, that is the amount of debt reported to the credit bureaus. When you lease a car, the vehicle's residual value doesn’t show up on your credit report. For example, if the $30,000 vehicle is expected to be worth $15,000 at the end of your lease, only $15,000 shows up as debt on your credit report.

One thing to keep in mind: not all leasing companies report to all three credit reporting agencies. Some lessors only report to one or two, and some may not report to credit bureaus at all.

If you've had your lease for 60 to 90 days and the lease isn't showing up on your credit report, call the leasing company and ask whether it's their policy to report leases to the credit bureaus.

Short of getting out of your lease early, there's not much you can do if your lessor doesn't report to any of the credit rating agencies. So, if you want to ensure your lease will appear on your credit report, consider asking about their credit reporting policies before submitting a lease application.

Does leasing a car improve your credit score?

Does leasing a car build credit? Leasing a car can improve your credit score if you manage your lease well. Let's look at how your credit score is calculated and the ways leasing a car can affect your credit.

1. Payment history. Payment history accounts for 35% of your FICO Score. Lease payments are reported to the credit bureaus just like loan payments, so a history of on-time lease payments will positively impact your credit score. Likewise, missing lease payments can negatively affect your score.
2. Amounts owed. Amounts owed account for 30% of your FICO Score. Because leases show up on your credit report, they do impact your total debt.
3. Length of credit history. Length of credit history accounts for 15% of your FICO score. Generally, having a long credit history is good for your credit score. Starting a new car lease may initially cause your credit score to drop by a few points because it brings down the average age of all your accounts. However, that small drop should rebound quickly once you start making on-time payments.
4. Credit mix. Credit mix means using various credit types: credit cards, retail accounts, installment loans, and mortgages. Credit mix accounts for 10% of your FICO Score and favors consumers who use a variety of credit types. If the only active accounts on your credit report are revolving accounts like credit cards, adding an installment loan or car lease can improve your credit mix and help your credit score.
5. New credit. New credit accounts for 10% of your FICO Score. When you apply for a lease and the dealership runs your credit, a hard inquiry will show up on your credit report, which could cause your credit score to drop by a few points. However, this impact should be short-lived. Most credit scoring models, including the FICO Score, recognize that people may get several quotes to compare rates and lease or loan options, so try to keep your rate shopping within a 14-day window.^[4]

To summarize, leasing a car may cause a short-term drop in your credit score. But in the long term, leasing a car can improve your credit score — as long as you make your monthly payments on time.

Is it better to lease or buy a used vs. new car?

Leasing tends to result in a lower monthly payment than financing the purchase of the same car over the same period. But one way to have a lower monthly payment on a car loan is to opt for a long-term car loan.

Many auto lenders offer car loans of six to eight years to help car buyers afford the monthly payment. But this kind of loan can be risky.

Long-term car loans make it easy to become "upside-down" on a car loan, meaning you owe more on the loan than the car is worth. Being upside-down may not pose a problem if you hold onto the car for several years. However, if the car gets stolen, totaled in an accident, or you want to sell or trade it in while your loan is upside down, you may need to come up with cash to pay off the loan balance.

Loans on new cars tend to go upside down more often than used cards simply because new cars lose 11% of their value as soon as you drive them off the lot. They lose another 15% to 25% of their value during their first year on the road.^[5]

However, if your heart is set on driving a new car every few years and you want to keep your monthly payments low, then leasing is the way to go. With a vehicle lease, depreciation is factored into your lease payments. If the car loses value faster than expected, it won't affect your lease payments because you don't own the vehicle. You just return the car to the leasing company when your lease term is up. However, you can also decide on buying out a car lease, if you’re really interested in owning the car.

The decision to lease or buy is easier once you know your long-term goals. So do your research on the car you want to drive, shop around, and run the numbers through a lease deal versus buy calculator. You'll be ready to sign a lease term agreement or loan agreement and drive the car of your choice off the lot in no time.

Sources:

1. Edmunds, “Is a High-Mileage Lease Right for You?”
   https://www.edmunds.com/car-leasing/is-a-high-mileage-lease-right-for-you.htm Accessed August 13, 2021
2. Experian. “What Credit Score Do I Need for a Car Lease?”
   https://www.experian.com/blogs/ask-experian/what-credit-score-do-i-need-for-a-car-lease Accessed August 12, 2021
3. Experian, “State of the Automotive Finance Market Q1 2021,”
   https://www.experian.com/automotive/auto-credit-webinar-form Accessed July 7, 2021
4. FICO, “Credit Checks: What are credit inquiries and how do thy affect your FICO Score?”
   https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries Accessed August 13, 2021
5. Edmunds, “Depreciation Infographic: How Fast Does My New Car Lose Value?”
   https://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html Accessed August 13, 2021

About the author

Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes. See Janet on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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