Auto Loan vs Lease?

Only about 20% of consumers opt to lease their vehicle.  A decade ago, that percentage was much higher, over 30%, but the post-millennium surge of dealer offers like 0% financing and cash-back incentives made buying more enticing.  Before we get into why an auto loan is better than a lease, let’s review the advantages of a lease:

Leasing Advantages

1. Driving a New Car Every Two Years
2. Lower Initial Cash Outlay
3. Lower Maintenance Cost
4. No Negative Equity

Negative equity, known colloquially as being “upside-down” on your auto loan, means that you owe more than the car is worth.  This is due to depreciation.  Sadly, in 2008 nearly 30% of trade-ins carried negative equity, and the average debt on such vehicles was nearly $4000.  Many consumers are just afraid of getting themselves into such an upside-down situation, and so forego financing altogether.

These benefits aside, leasing comes with some distinct disadvantages.

Leasing Disadvantages

1. No Chance to Build Equity
2. Only Cheaper in the Short-Term
3. Mileage and Wear & Tear Restrictions
4. Neverending Cycle of Car Payments / Never Paid off

A last but important disadvantage to leasing is no sense of ownership.  Speaking from personal experience, that highly sought-after new car smell, ever-present in leased vehicles, can end up turning on you, making you feel like you’re driving a rental vehicle (and by some definitions you are).

Additionally, a leased vehicle is never paid off.  Even the longest-term auto loans are paid off in 5-6 years.  In the same way you wouldn’t want to rent an apartment or house your whole life, forking over thousands of dollars a year to a landlord instead of putting money toward your own stake in the property, you don’t want to be making payments on a vehicle that you will never be able to drive free of charge or resell.

For these reasons, we recommend applying for an auto loan instead of leasing.  That said, if you absolutely have to drive a new vehicle every two years, and you love it always to be a new one, then an auto lease might be the way to go.  Often you can get more car for the money.  But remember:  80% of US drivers choose to buy their vehicle because they know it’s the best choice financially.