Updated for tax year 2023.
Are you ready for a new set of wheels? A new vehicle is a significant expense that requires careful consideration for most families. If you’re on the fence about which car-buying method is right for you, keep reading to discover the pros and cons of buying versus leasing.
When it’s better to buy
A car lease usually requires less upfront costs and monthly payments than buying, but purchasing a vehicle is generally cheaper in the long run. Each option has benefits depending on your situation, but buying is probably the better option if any of the following are true for you.
1. You don’t mind a slightly used car.
Usually, purchasing a used vehicle is the most financially savvy decision. That’s because you avoid steep first-year depreciation. The actual depreciation rate depends on many factors, but many new cars lose 20% of their value in the first year, and many new cars will be worth much less than their purchase price after the first five years.
Another perk of buying used is that insurance and vehicle registration fees are usually lower for slightly used cars. However, keep in mind that repair and maintenance costs may be higher. And if you can buy a used car with cash, you’ll skip interest on loan payments and come out even further ahead financially.
2. You plan to keep your car for a long time.
Many Americans tend to keep their cars for several years. If you plan on driving your car for eight years or more, buying is usually the better option, especially if you can pay off the car loan and build equity.
3. You drive a lot.
One of the cons of leasing is that most leasing companies have mileage restrictions and typically charge 15 to 25 cents for every mile driven over a set limit (usually anywhere from 10,000 to 15,000 miles per year). That excess mileage can add up quickly. You can negotiate a higher number of miles, but you’ll probably have to pay more for the lease.
When you purchase a vehicle, you don’t need to worry about mileage limits, although keep in mind that vehicles with high mileage often have a lower resale and trade-in value.
4. You’re hard on cars.
Buying is usually the way to go if you have young kids or haul heavy machinery in your car. When you return a leased car, a little wear and tear is okay, but generally, the vehicle needs to be close to its original condition. If it shows excessive wear, you’ll likely be charged for damages. You may also need to show documentation that you got all the recommended oil changes, tire rotations, and tune-ups.
5. Your credit isn’t perfect.
Securing an auto loan is often easier than getting a good lease deal, especially if you’re rebuilding your credit. Auto loans typically have more lenient qualification criteria than leases, which are stricter and less accommodating of past credit issues. Leasing contracts can often have tighter credit requirements than auto loans, making them a less accessible option if your credit score isn’t in great shape.
When it’s better to lease
While there are many pros to buying a car outright, it isn’t always the better option. If any of the following are true for you, you may want to lease your next vehicle.
1. You’re self-employed and drive your car for business.
If you’re self-employed and drive for work, you may be able to deduct your lease payment — the deductible amount just depends on how often you use your car for business purposes. For example, if your lease payment is $300 a month and you drive your car for business 50% of the time, you can deduct $150 a month as a business expense.
There’s one catch, though. You must subtract an “income inclusion” amount from your deduction if the car exceeds a certain value. This is an additional amount of income you may have to report if you lease a vehicle or other property for business purposes. You must report the inclusion amount if the asset’s fair market value exceeds a certain threshold ($60,000 for a vehicle first leased in 2023). The inclusion amount differs depending on how long you’ve leased your car and is calculated by finding the dollar amount on a price table from the IRS (page 33).
Bottom line? Leasing offers tax advantages for self-employed people who drive for work, especially for more expensive cars. If you work for yourself, don’t forget you can also deduct business-related car expenses such as parking fees and tolls, gasoline, oil, car insurance, garage rent, registration fees, lease fees, and repairs.
2. You always want the latest car with the newest technology.
If you want to upgrade your ride often, a leased vehicle may be a good option. Financing the entire purchase of a car you keep for less than three years usually doesn’t make financial sense. However, if a car is expected to have a higher-than-average resale value, it may still be worth buying.
3. You want cheaper upfront costs and lower monthly payments.
When you lease, you only pay for the difference between the sticker price and the car’s expected value at the end of the lease, plus interest rates and fees. You may not even need a down payment if you have excellent credit. It’s almost always cheaper in the short term to lease a car rather than buy it.
While leasing a new vehicle typically costs less out-of-pocket over a certain number of years, keep in mind that at the end of a leasing period, you don’t own the car and can’t resell it. That’s why purchasing a car is usually less expensive in the long term.
4. You want an electric car
Thanks to recent changes to the EV tax credit, strict battery capacity requirements, income requirements, and other rules limit which electric cars qualify for the full tax break. However, if you have your eye on a vehicle that doesn’t typically qualify for the tax credit, there’s an interesting loophole for leased electric vehicles. With this loophole, a leased EV is considered a commercial vehicle, not subject to the same stringent tax credit requirements.
But there is a catch. When you lease an EV, the dealer receives the commercial vehicle credit (up to $7,500). Because of this, it’s entirely up to the dealer to pass those savings along to you, the lessee, by lowering the purchase price or offering a rebate. Some dealers even automatically factor the tax credit into their lease deals. However, not all dealers will be keen to pass along these savings to the customer. If you do strike a deal with the car dealership, it’s also a good idea to ask for an itemized bill of sale to confirm the tax credit discount was applied correctly.
Keep in mind that electric vehicles may depreciate faster than gas-powered cars. This is another important reason why leasing an electric car may be a better option for many people.
The bottom line
Before you get behind the wheel of your next new car, it pays to research the pros and cons of buying vs. leasing. Learn about the tax advantages and run cost comparisons before you make a decision, and whether you choose to buy or lease, don’t forget to enjoy the ride.