Leasing a car is like renting a car for a long period of time. It differs from ownership in that you do not actually own the car and cannot dispose of it at your discretion.
Leasing gives you the option to use the vehicle for a certain period of time, usually 2 to 3 years. During this time, you have to make monthly payments, but not for the entire value. You only pay for the depreciation of the car (calculated as the difference between the original and residual values) plus interest, as well as taxes, insurance and administrative fees, and sometimes GAP insurance. GAP covers the difference between the market value of the car and the amount you still have to pay if it is stolen or totaled.
Buying will allow you to take immediate ownership of the vehicle. You’ll pay more monthly, but you’ll end up owning the asset.
Many leasing contracts provide for the possibility of buying the car at residual value. This can be done either at your own expense or by taking out a loan for the remaining amount. While this can be a path to ownership, it comes with risks. The buyout price may be higher than the car’s current market value, or the vehicle may need costly repairs after heavy use.
If you don’t plan to buy back the auto you used, you can:
- hand over the car at the end of the contract and walk away;
- lease another car and continue to use the new vehicle while continuing to pay monthly payments.
When buying, to start using another car, you will most likely have to sell your current car, which is a hassle (the alternative is trade-in).
You can take a short quiz on lease-vs-buy.com to find out which ownership model is better for your needs. It takes into account your mileage, budget, ownership period, and more. Below, we’ll walk through key differences between leasing and buying a car.
Brief algorithm to Leasing a Car
To lease a car through a dealership you need to follow five steps:
- Decide what type of car you want — a sedan, SUV, or something larger.
- Check the vehicle’s price — this affects your monthly lease payments.
- Discuss terms with the dealer — your credit score, vehicle price, and expected annual mileage all impact the monthly cost.
- Make the initial payment. Down payments for leases are usually lower than for purchases. Those with FICO scores above 720 typically only need to pay the first month’s rent and enrollment fees. If the score is low, you may be required to contribute an amount of $5,000 or more. The higher the contribution amount, the lower the monthly payment will be. Also note that credit history affects not only the down payment, but also the money factor, which essentially determines the percentage of overpayment for rent.
- Sign the lease agreement. Keep in mind there may be additional charges at the end of the lease — like wear-and-tear fees, excess mileage charges, and a vehicle disposition fee.
Is Leasing Right for You?
Leasing a car may be a great fit if you:
- Enjoy driving a new car every few years with the latest tech features
- Drive less than 15,000 miles per year
- Prefer lower monthly payments
- Don’t want to pay a large amount upfront
And if you’re new to the U.S., leasing can help build your credit history to qualify for future loans on more favorable terms.
Buying a new car will require you to have a large amount of cash or finance the purchase and pay off the loan with monthly payments, just like leasing, only the payments are likely to be larger.
What You Need to Finance a Car
If you’re planning to buy a car with financing, here’s what lenders usually require:
- A good credit score (the higher, the better your interest rate)
- A Social Security Number (SSN)
- Proof of steady employment
- Proof of income — typically your last 2–3 pay stubs or recent tax returns
In addition to finding the right car at a good price, you will have to visit several banks and dealers to compare offers and find more favorable terms. You can also visit online platforms (e.g. Capital One Auto Navigator, AutoPay, etc.), which can also offer good terms.
What Are Auto Loan Rates in 2025?
Your interest rate will depend on several factors:
- Credit score: Higher scores mean lower rates
- Loan term: Shorter terms have lower rates but higher monthly payments
- Economic conditions: Inflation and broader market trends affect rates
Here’s a comparison of average interest rates in 2025 for new car loans and estimated equivalent lease rates based on credit score:
| FICO Credit Score | Auto Loan APR (New Cars) | Estimated Lease APR Equivalent |
| 781–850 | 5.25% | 3.0%–4.2% |
| 661–780 | 6.87% | 4.2%–6.0% |
| 601–660 | 9.83% | 6.0%–8.4% |
| 501–600 | 13.18% | 8.4%–10.8% |
| 300–500 | 15.77% | 10.8%–13.2% |
How Much Do You Need for a Down Payment When Buying a Car?
Like with leasing, your required down payment can vary widely based on the lender and your credit profile. On average, expect to put down 10–20% of the car’s purchase price when buying.
Leasing vs. Buying: Pros and Cons
To help make the right decision, here’s a quick side-by-side comparison of leasing vs. buying a car:
| Feature | Leasing | Buying |
| Manufacturer warranty covers the full term | ✅ | ❌ |
| Easy to upgrade to a new car frequently | ✅ | ❌ |
| Full ownership and freedom to customize | ❌ | ✅ |
| Unlimited mileage | ❌ | ✅ |
| Lower insurance requirements | ❌ | ✅ |
| Depreciation doesn’t affect you | ✅ | ❌ |
| Easier qualification with lower credit score | ❌ | ✅ |
So, Which One Should You Choose?
The choice between leasing and buying depends on several personal factors:
- Your driving habits and mileage
- Your credit score
- Your financial situation
- Your long-term goals and preferences
There’s no one-size-fits-all answer. Every situation is unique, so it’s best to evaluate both options carefully. Try a free tool at lease-vs-buy.com to compare scenarios based on your budget, driving needs, and ownership goals.
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