Should You Lease or Buy a Car? Here Are Some Factors to Consider

By the Mercury Team

When it comes to getting a new car, one of the biggest decisions you’ll face is whether to lease or buy. Each option has its own set of advantages and potential drawbacks, and the right choice often depends on your lifestyle, financial situation, and long-term goals. We’re here to help you decide which option is right for you and provide information on what to expect from an insurance standpoint.

Lease or Buy a Car: Key Considerations

Each option comes with its own set of costs and budgeting considerations that can affect your wallet both now and in the long run. These include:

Upfront Costs

One of the first differences you’ll notice between leasing and buying is the upfront cost. If you choose to lease, you’ll typically pay less upfront — often just the first month’s payment, a security deposit, and some fees. On the other hand, buying usually requires a more substantial down payment, which can be a big portion of your budget.

Monthly Payments

Leases typically come with lower monthly payments compared to financing a car purchase. This is because, with a lease, you’re essentially paying for the car’s depreciation over the lease term, not the entire value of the vehicle. However, while these lower payments can be tempting, you’ll need to continue making payments if you lease another car after your current lease ends. If you buy, your monthly payments might be higher, but once you pay off the loan, the car is yours, meaning no more payments.

Overall Expenses

While leasing might seem more budget-friendly month-to-month, you must consider the long-term financial implications. Leasing often means you’ll have perpetual car payments, and you won’t build equity in the vehicle. Buying a car, while more expensive upfront and month-to-month, can be more cost-effective in the long run since you’ll eventually own the car outright.

Leasing vs. Buying a Car: Pros and Cons

The lease vs. finance debate depends on various factors, including upfront costs, driving freedom, and vehicle depreciation. Let’s take a look at the pros and cons of buying and leasing a car.

Advantages of Leasing

• The down payment and monthly payments typically cost less than buying a car.
• You have more flexibility when your lease is up. You can choose to buy the car, lease a new one, or simply walk away.
• You could get a tax break using your leased car for business purposes.
• Repairs usually cost less because the vehicle is under the factory warranty.

Benefits of Buying

• You’re building equity in the car, as each payment you make brings you closer to owning the vehicle outright.
• Once you own the car, you have flexibility in selling or trading in your car.
• You can customize your car however you want.
• There’s no penalty for exceeding mileage limits or returning the car with more wear and tear than expected.

Drawbacks of Leasing

• You don’t own the car unless you decide to negotiate a lease buyout at the end of your lease.
• If you always lease, you’ll make car payments for the rest of your life.
• You have annual mileage limits — typically 15,000-20,000 miles. You’ll owe fees if you drive more than those limits.
• Any excessive wear to the car will result in fees.

Drawbacks of Buying

• The car’s value depreciates as soon as you drive it off the lot.
• There’s typically a higher down payment and monthly payment since you’re financing the car’s entire cost.
• You’re responsible for all maintenance costs after your warranty expires.

Difference Between Lease and Finance: Insurance Considerations

When it comes to insuring your leased or financed car, there are a few considerations to keep in mind:

Insurance for Leased Vehicles

Most states require you to carry auto insurance, regardless of whether you finance or lease your vehicle. Here are the main coverages to consider:

• Liability protection: If you’re legally responsible for an accident, this coverage helps pay any medical expenses or repair costs.
• Uninsured/underinsured motorist coverage: This coverage helps pay for damages to your vehicle caused by an uninsured driver or driver who doesn’t have adequate insurance.
• Personal injury protection (PIP): PIP helps pay for medical, funeral, and other expenses no matter who’s at fault for the accident.

Insurance Coverages Required by Your Leaseholder

Whether it’s a dealership or a specialized vehicle finance company, that entity owns the car you’re driving. Your leaseholder will likely require you to carry these coverages to protect its financial interest in the vehicle:

• Collision protection: This coverage helps pay for repair costs due to a collision, regardless of fault.
• Comprehensive coverage: This coverage financially protects you if your car gets damaged in an event other than a collision.

Insurance That May Be Included in Your Car Lease

According to the Insurance Information Institute, gap insurance is typically rolled into your lease payments. If you total or damage your car beyond repair, gap insurance can help pay the difference between your remaining lease balance and the check you receive from your insurance company. Be sure to check with your dealership or specialized vehicle finance company you purchased the vehicle from to see if gap insurance is included in your lease.

Insuring a Financed Car

Insuring a financed car is not too different than insuring a leased car. Most states require you to carry liability protection. Depending on where you live, you may also have to purchase uninsured/underinsured motorist coverage and personal injury protection (PIP). Other insurance requirements depend on how you buy your car.

How Do Car Loans Affect Insurance?

If you decide to finance your vehicle, your lender may require comprehensive coverage and collision protection on your car insurance policy. Once you pay off your loan, you can choose whether to keep these coverages or not.

What If I Buy My Car?

If you purchase your car without a loan, comprehensive coverage and collision protection are optional. However, getting these coverages may be a good idea if you can’t afford to repair or replace your vehicle with your savings.

What If I Buy a Brand-New Car?

New cars generally cost more to insure because they have a high actual cash value (ACV). However, if your vehicle is equipped with the latest safety features and upgrades, you may qualify for auto insurance discounts to help lower your premium.

Conclusion

Deciding whether to lease or buy a car depends on your personal circumstances, driving habits, and long-term goals. If you prefer lower monthly payments, enjoy driving a new car every few years, and appreciate the flexibility at the end of the lease term, leasing could be a good option. On the other hand, buying might be more suitable if you’re looking to build equity, avoid mileage restrictions, and ultimately save money in the long run by owning your vehicle outright.

No matter which route you choose, securing the right insurance is key. At Mercury, we understand the importance of protecting your investment, whether you lease or buy. We offer cheap auto insurance options that don’t compromise on coverage, ensuring you get the best protection at a price you can afford.

Contact us today for a fast, free quote!