Buying vs. leasing a car: Which is the better deal for you?

If you're in the market for a new or used car, one of the most important choices you'll make is how to pay for it. Sure, cash would be ideal -- but very few people are in a position to bring a suitcase stuffed with dollars to the dealership. For many of us, it comes down to a choice between buying or leasing a car.

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In most cases, leasing makes the most sense for people who want to keep their monthly payments as low as possible -- while driving a newer car stocked with the latest automotive technology. But there are a few big caveats. First, you'll likely need to put some money down -- from a few hundred dollars to many thousands, depending on the car. Also, most leases limit you to driving a maximum of 15,000 miles per year -- and there are expensive penalties if you exceed it. And, finally, at the end of a lease, you own nothing -- which means you'll need another lease, sweeping you into a cycle of never-ending car payments. 

"If you think you will want to change your car in a few years, say two to three, then leasing is a good option," said LendingTree Chief Economist Tendayi Kapfidze. "If you are one to drive a car till it's on its last legs, then it's better to buy. Leasing can get you into a higher-priced car for a lower payment, but be wary that you are not overextending your finances to do so."

Financing a car: Cash vs. credit card vs. loan

If you can afford it, paying with cash is always the best option. Some dealers may allow you to pay with a credit card -- but they'll be on the hook for a processing and you'll be subject to a sky-high interest rate (which is about 19% for the average credit card). In short, you're going to end up paying through the nose. 

In contrast, the average auto loan interest rate is just over 5%. But many dealers run promotions featuring even lower interest rates -- sometimes as low as 0% -- though they may be available only to buyers with excellent credit scores. Your bank may not be as strict with its eligibility requirements,  but it also may not be able to offer such a low-interest rate. That noted, for the average consumer, the difference between paying with a credit card and a loan could translate to a difference of more than $10,000 in interest payments alone on a 5-year $25,000 loan. 

The bottom line: Shop around. Talk to your bank first, then see if the dealership can beat its offer.

Leasing a car: How does it work? 

A lease is like a long-term rental. You don't officially own your car -- and you need to hand it in at the end of the lease. So: no ownership, but fewer responsibilities, too.

"The upside of a lease is always driving a relatively new car; the typical lease ends after three years, at which point most leases re-up on a newer model," said Brian Martucci, finance editor for Money Crashers. "The (likely) lower payment brings luxury car ownership within reach for those not made of money, too."

With most leases, you agree to a monthly payment and put down a certain amount of money at the beginning, although some dealers run promotions that require no money down. During the lease period, typically 36 months, you're required to take care of the car, keeping up with scheduled maintenance and not exceeding the annual mileage limit, which is usually between 12,000 and 15,000 miles. (Exceeding your allowed mileage can result in some stiff penalties, from 10 cents to 30 cents a mile, depending on the agreement.) 

At the end of the lease period, you have three options. You can pay the dealer to keep the car. You can turn it in and start a new lease on another car; some dealers will give you better terms once you become a repeat customer. Or you can end the lease, pay any fees incurred --  for extra mileage and excessive wear and tear --  and walk away.

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Breaking down the math: Leasing vs. buying 

A 2020 Toyota Highlander starts at approximately $34,600. If you have good credit, you should be eligible to lease it for about $329 per month for 36 months -- with $2,999 due at signing. And at the end of the 36 months, you would have the option to start a new lease or buy the car outright for what the dealer considers to be the value of the vehicle. Rolling over a lease offers one considerable perk: Some of the fees you owe at end of one lease may be deducted from the price of your next lease. 

Financing the same with a standard loan from Capital One -- featuring a 3.59% promotional APR -- gives you a $630 monthly payment for 60 months and would require no down payment. 

In total, you'd pay approximately $15,636 for a three-year lease, or a little more than $5,000 each year. In contrast, you'd pay $37,850 over the course of five years if you buy the Highlander with the Capital One loan.

Comparison of leasing and buying a 2020 Highlander

Correction, Aug. 6 at 1:02 p.m. PT: The original version of this story incorrectly stated the monthly payment for the 2020 Toyota Highlander lease example. The amount listed by Toyota is $329.