For most families, purchasing a new car is a big expense that needs to be carefully considered. Discover the benefits and drawbacks of buying versus leasing if you’re not sure which approach to take when buying a car.

When it’s better to buy

While leasing an automobile typically has lower initial costs and ongoing monthly payments than buying one, buying a car is typically less expensive over time. Purchasing is generally the preferable choice if any of the following apply to you, while each option has advantages based on your particular circumstances.

1. You don’t mind a slightly used car.

Buying a used car is typically the most prudent financial move. This is because there is no significant first-year depreciation. Many new automobiles lose 20% of their value in the first year, and after the first five years, many new cars will be worth substantially less than their original price. The actual depreciation rate is dependent on numerous factors.

The fact that insurance and vehicle registration costs are typically lower for slightly used cars is another benefit of purchasing used. But bear in mind that maintenance and repair expenses can be greater. You’ll save money by not having to pay interest on your loan if you can pay for a used automobile with cash.

2. You plan to keep your car for a long time.

The average American automobile owner owns their vehicle for multiple years. Purchasing is typically a better option if you want to keep your automobile for eight years or longer, particularly if you can pay off the loan and accumulate equity.

3. You Drive a lot.

One drawback of leasing is that most leasing firms impose mileage    restrictions, meaning that for every mile over a predetermined limit—typically between 10,000 and 15,000 per year—you will be charged 15 to 25 cents. That extra mileage adds up rapidly. Although you can bargain for extra kilometers, the cost of the lease will undoubtedly increase.

You don’t have to worry about mileage restrictions when you buy a car, but bear in mind that cars with high miles frequently have lower trade-in and resale values.

4. Your cars Typically Go through a lot of Wear and Tear

Purchasing is typically the best option if you transport large machinery in your car or have little children. A small amount of wear and tear is acceptable when returning a rented car, but it should ideally be in almost original condition. If there is noticeable wear, you’ll probably be responsible for any damages. Documentation attesting to the fact that you received all advised tune-ups, tire rotations, and oil changes may also be required.

5. Your credit isn’t perfect.

Obtaining a decent lease is frequently more difficult than securing an auto loan, particularly if you’re trying to restore your credit. Generally speaking, auto loans have easier qualifying requirements than leases, which are harder to qualify for and less understanding of credit history. If your credit score isn’t too good, leasing contracts may be less accessible than auto loans because they frequently have stricter credit standards.

 

When it’s better to lease

Even though purchasing an automobile entirely has numerous benefits, it isn’t always the best course of action. If any of the above apply to you, you might want to consider leasing your next car.

1. You’re self-employed and drive your car for business.

Lease payments may be deductible for self-employed individuals who drive for work; the exact amount of the deductible will depend on how frequently you use your vehicle for work-related travel. For instance, you can write off $150 per month as a business expense if your lease payment is $300 per month and you use your automobile for work 50% of the time.

But there is a catch. If the car’s value is more than a specific level, you have to deduct an amount known as “income inclusion” from your deduction. If you rent a car or other piece of property for work, you might be required to record an additional amount of income. If the asset’s fair market value surpasses a certain threshold ($60,000 for a vehicle originally leased in 2023), you are required to declare the inclusion amount. The inclusion amount is determined by determining the dollar amount on an IRS price table (page 33), and varies based on how long you have leased your car.

For independent contractors who drive for business, leasing has tax benefits, particularly for higher-end vehicles. Remember that you can also write off business-related auto expenses, including tolls and parking fees, fuel, oil, auto insurance, garage rent, registration, lease fees, and maintenance, if you are an independent contractor.

2. You always want the latest car with the newest technology.

Leasing a car could be a smart choice if you always want to enhance your transportation. It is typically not financially wise to finance the full cost of an automobile you intend to maintain for a shorter period of time than three years. Even yet, it can still be worthwhile to purchase an automobile if its estimated resale value is higher than average.

3. You want cheaper upfront costs and lower monthly payments.

When you lease, the only costs you incur are interest rates and fees in addition to the difference between the car’s sticker price and its estimated worth at the end of the lease. In case you have outstanding credit, you can not even require a down payment. Leasing a car is almost always more cost-effective in the short run than buying one.

Although leasing a new car usually results in lower out-of-pocket expenses over a predetermined number of years, bear in mind that you forfeit ownership of the vehicle at the conclusion of the lease and are unable to sell it. Because of this, buying a car is typically less expensive over time.

4. You want an electric car.

Strict battery capacity limits, income limitations, and other regulations restrict which electric cars are eligible for the maximum tax cut, due to recent modifications to the EV tax credit. However, there is an intriguing loophole for leased electric vehicles if you have your eye on a car that isn’t usually eligible for the tax credit. Thanks to this loophole, a leased electric car is exempt from the strict tax credit requirements and is regarded as a commercial vehicle.

There’s a catch, though. The dealer gets the commercial vehicle credit (up to $7,500) when you lease an electric vehicle. As a result, the dealer has complete discretion over whether to pass those savings on to you, the lessee, by reducing the purchase price or providing a refund. In certain cases, dealers incorporate the tax credit into their leasing agreements automatically. Not every dealer, though, will be eager to give the consumer these savings. In order to make sure the tax credit reduction was applied appropriately, it’s a good idea to request an itemized bill of sale from the car dealership if you do end up making a deal.

Remember that compared to gas-powered cars, electric vehicles may depreciate more quickly. This is just one more compelling reason why renting an electric vehicle can be a better choice for a lot of individuals