Car Leasing vs. Buying: Hidden Fees, Dealer Agendas, and When to Buy Your Leased Car

12:25Elizabeth Ayoola:Speaking of buying a new car, my sister's currently in the market for a new car, and she is complaining about how expensive the cars are at the moment. That's another reason I'm not buying a new car. So buying a new car has become expensive over the past few years. You all know that tariffs and also the impact of COVID-19 on supply chains are two factors contributing to those higher prices. Shannon, can you expand on why these cars have become so expensive? Yes, I can. And I'll tell you right now, the average, average new car price is still right around$50 ,000. So how much money for a car, for a depreciating asset?

13:03Yeah, that gives some perspective on how high car prices are. And a lot of that does come from during and after COVID-19. You know, we had supply chain disruptions and inventory shortages. And then in 2024, you know, prices seemed to be coming down a little bit. But then last year, we threw tariffs back into the mix. And so what you had, or some, or you still have, some car manufacturers that are passing those higher tariff costs that they're experiencing through to consumers. So, you know, I think that has also contributed to keeping car prices high. We can't overlook the fact that, you know, the higher car prices aren't all a result of outside factors.

13:47You know, you just, you look at new cars today, they have a lot more advanced technology and safety features, which just, you know, keep that price higher. Well, have you seen the cost of leasing go up too, Shannon? Yes, it has. And it's really for the same reasons that car prices are, you know, cost more to take out when you take out a loan. Those same supply chain issues and inventory shortages that caused the higher vehicle prices overall, you know, contributed to an increase in leasing costs because that lease payment is based on the car's residual value. So, you know, that just that translates into a higher lease payment.

14:24And just like, you know, taking out an auto loan, the cost of leasing hasn't returned to pre-COVID prices because it's still, you know, based on the value of the vehicle and, you know, higher interest rates. You can find some lease specials today. I double-checked yesterday, and you can find some lease payments around$250 to$3 monthly. But those usually require a down payment of about$3 ,000 or more, and those are usually reserved for people with excellent credit.

15:02Sean Pyles:The down payment on a lease has always been something that I can't swallow. It just seems like you're really throwing money away. I'm paying a cap of money, a surcharge, essentially, to be able to rent this car for a couple of years. And then I don't see any of that money back. And I know that it's going toward making the monthly payment more affordable, or I assume that that's the case. But I just really have a hard time with that. Auto experts actually recommend not putting a down payment on a leased car because something, like you said, If something happened that you wrecked the vehicle, or as you said, you turn it back in, that money's really just gone.

15:37Sean Pyles:You're not getting much for it, right. When you're buying a car, your down payment is going into building that equity you mentioned before, and again, hopefully having a lower monthly payment, and you're just not really getting the same tradeoff with a lease. But that said, there is still a use case for leasing, and sometimes it can be a better option for people. So can you lay that out for us? Yes, I can. There are benefits. And a lot of it really just depends on your financial situation. We mentioned lower monthly payments. Maybe you just really need a lower monthly payment. To illustrate the difference in payments, I have some real numbers from Experian, the credit reporting agency.

16:16They put out a quarterly state of the automotive finance market report. And late last year, their average lease payment for a new car was around$596. dollars compared to average new car loan payment at$748. So, you know. It's still so much money for both of those. Yeah. Yeah, it's still a lot for both. But of course, that's an average. You know, that's what you have to keep in mind. You know, you look at a lot of people are still leasing or buying. Actually, the majority of people are still are leasing and buying large vehicles, you know, the vehicles with advanced technologies. So that really pushes that average payment price up.

17:00But, you know, you can find, like I said, lease specials with monthly payments for less than$300. But again, that's typically for people with excellent credit. The lease specials, I will say this, right now it seems like more automakers are motivated to offer some great lease specials because during COVID, the interest in leasing for consumers really dropped off. And at that time, car manufacturers, you know, they pulled back on lease incentives so that, you know, the interest, like I said, just really tanked. Auto manufacturers, they're trying to rebuild that leasing business. So to do that, they're making some attractive lease specials.

17:42And you can usually find those, you know, on the auto manufacturers' website.

17:47Sean Pyles:Leasing can also be a lifestyle choice, too. I'm thinking here about one of my sisters who's gone through three cars in about the past five, six years or so. So going through two cars or going through a car about every two years, she was buying these cars, is a really expensive financial decision. And so she most recently has actually made the decision to lease because she just knows, hey, I'm someone who likes a new car every couple of years. She's getting more into electric vehicles, which have technology that's increasing and improving really rapidly. And so if you are that type of person who wants a new car on a regular basis, especially an electric vehicle, leasing can just be a better option for you there.

18:25Elizabeth Ayoola:Yeah, I have a friend in the same situation. I met her maybe three years ago, and I've maybe seen her with three different cars. Wow. So she, yeah, she likes driving new cars, and leasing works for her on her budget. And she doesn't want to buy, so I agree with you, Sean. Yeah, a lot of people do that. um and and it's you know two they like the newest technology so they you know they don't mind uh the fact that they're not building equity they want to you know they want to be able to try the newest model every few years um you know that latest technology and then there are you know group of people that you know maybe they just you know want to try a particular type of car before they actually commit to it long term with a loan.

19:07You know, maybe they go into it knowing that, you know, they're going to lease and drive for a few years and that if they like that car, they know that they can go ahead and take out a loan later and purchase it.

19:17Sean Pyles:Yeah, I'm glad that works for them. I am not that type of car owner. My 2016 car still has physical buttons and a CD player, not a screen in Snite and my car. And I love it.

19:28Elizabeth Ayoola:That is fun. All right, let's get into Patty's question. She had a couple of questions for us. So Patty wants to know if the lease payments applied go towards the purchase, since that's what the salesperson told her. Was the salesperson telling the truth, Shannon? No. Oh, sorry, Patty. Sorry.

19:51I'll just state that very clearly. No. You know, I assume what he may have been trying to imply, that if she decided to buy the car, her payments would have already covered the car's depreciation. But you could say the same for an auto loan. I think the way he worded that is misleading.

20:13Sean Pyles:Made it sound like it was rent to own for a lease. Right, yeah. It wasn't really the case. Exactly. It's like you don't just transfer credit for your lease payments over to a new car loan. The lease and the loan are two different things, and that's kind of the way he worded it. That's what it kind of sounds like. For example, you know, how that would work when I say it's two different things. Let's say you take out, you know, a 36-month lease for a$50 ,000 car loan. I'm using just rounded numbers here. This is very simplified. So, you know, you would have an estimated residual value of around$30 ,000.

20:47So, you know, you're paying roughly$20 ,000 in depreciation over that three years. So let's say using, you know, building on that example, your lease payment is$700 a month. And you have, so you would have about$550 of that going toward the$20 ,000 in depreciation. The rest would cover like interest and sales tax. So at the end of the lease, you decide to buy the car and you get a lease buyout loan to cover that$30 ,000 residual value. That's a separate transaction. It's like kind of like buying a used car from yourself. But that$700 payment you paid on the lease in no way reduces the$30 ,000 you now have to pay to buy the car.

21:34Sounds pretty expensive.

21:36Elizabeth Ayoola:Since we're doing some math here, Shannon, mathematically, is there a difference between the total cost of leasing, then buying versus just financing the car from day one? Yes, there can be. And usually there is. You know, when you finance from the start, you know, think about that. You're paying the full purchase price over time, including any fees or interest and on a declining balance. So that's it. You know, that's pretty cut and dried. You know, if you lease and then buy, if you think of, you know, you're paying financing charges during the lease, then you're paying financing charges again during the car loan.

22:12And then you, you know, you probably are going to have lease specific fees that wouldn't apply if you just purchased up front. So, you know, usually it does cost more to lease and then buy, especially if you're doing it perpetually compared to just financing from day one.

22:30Sean Pyles:Okay, we're going to take a quick break. And after that, we'll be back with more about leasing versus buying.

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24:31Sean Pyles:Okay, we are back. So let's continue this conversation. Shannon. Patty is essentially thinking about buying a used car, because that's what they would be getting if they buy the car they have been leasing at the end of the term. And aren't used car interest rates typically higher than that of new cars? To me, that sounds like another way that buying after leasing may turn out to be more expensive than buying the car outright or buying a new car. Now, new cars may also sometimes come with incentives like zero APR or maybe even cash back, although you're probably a lot less likely to get that with a lease, correct?

25:06Yes. But one thing that I want to say, you know, used car rates are higher than new car rates. But most lenders don't actually use their used car rate for a person who's buying a lease car. Most of them have a specific lease buyout loan. We do review a number of lenders here at NerdWallet that offer lease buyout loans. So, you know, I checked yesterday, and the lowest rate right now for excellent credit for our lease buyout loan is around 4.5%. And that is slightly below what a, you know, a typical used car rate would be. You know, if you're comparing the difference between used car rates and lease buyout loan rates, you know, the lease buyout loan, yeah, it's, you know, going to be more than a new car rate.

25:58but less than most used car interest rates. And yes, you probably would be skipping some new car incentives, but you have to think about the fact that you are financing a significantly smaller amount, so that's still often the cheaper approach. You want to look at the total costs for both options, not just the monthly payment before deciding.

26:21Sean Pyles:Okay. I'm also wondering here what the dealer might be getting out of this, because we know that dealers have their own agendas. So could there be any sort of hidden motivations about pushing the lease over a purchase from the dealer's perspective? What are your thoughts there, Shannon? Yes, there can be several. Dealers do like to lease cars because that brings the customer back into the dealership every few years for repeat business. You know, it's not like you, Sean, that have your car and you don't see the dealer again. They want me back in the dealer. They keep emailing me, sending me letters.

26:52Sean Pyles:They call me too.

26:53Elizabeth Ayoola:They call me at least once in my time. They call me too. I said, no, I don't want no more payments. No, no, no, no, no.

26:59Sean Pyles:It's flattering because they use this flattering language like you are extremely well qualified for another car. And sure I am, but you will not be getting my money. But the other thing is the return lease cars gives the dealer supply of used cars to sell. So they profit off of the car twice. So, yes, you know, the automakers, they do a lot of times incentivize dealers to push leasing, you know, for those very reasons. Patty has three choices, as we mentioned earlier.

27:28Elizabeth Ayoola:Leasing again, buying the car, or returning the car, and then losing what they've paid in. Can you talk through those three options for us? Let's look at Patty simply turning in the car and walking away first. You know, as we've said, she would lose what she's paid in. She would have no equity to put toward purchasing another car. She could lease again, and that would keep her payments lower and get her into a new vehicle. But that would also continue the cycle of never building equity and always having a car payment. And, you know, that's the reason why continuous leasing can be the most expensive option of the three for the long term.

28:08But then, again, her third option, she could buy. And if she decides to do that, you know, she should compare the buyout price with the car's current market value. The buyout price is lower than the market value or close. that could be, you know, a strong argument for buying the car. You know, if she's anticipating any extra fees or penalties at the end of the lease, buying the car for that original buyout price could also be a way to help cut those losses because, you know, then she wouldn't owe those to the dealership.

28:40Sean Pyles:So it really seems like the buyout is the most cost-effective option. Yes, it would be. You know, if she likes the car, it's dependable. the buyout price is reasonable. You know, I would say buying the car would be the most cost effective. And, you know, eventually it would allow her to enjoy years without a car payment, which she mentioned she values. And I want to go back to, you know, what she originally said about wanting to go all electric, because I don't want to make it sound like she shouldn't have leased in the beginning. That was actually really a smart move on her part. If she was new to looking for and driving an EV, you know, with the high price tag of EVs, that gave her a chance to see if she liked driving an EV before making a long-term commitment.

29:30Elizabeth Ayoola:Where does the cost, Shannon, of auto insurance come in here? I think whether you're leasing or buying, one should factor insurance into their car budget also. So is auto insurance usually more expensive when you're leasing versus buying a car? Yes. You know, whether you lease or you get an auto loan, you're always going to be required to carry car insurance to cover that asset or the car for the leasing company or lender. But leasing companies tend to have stricter requirements to protect themselves. They may require lower deductibles. They may require higher liability coverage than a lender or even that your state requires.

30:08So your insurance costs can be higher. One thing I do want to say too, though, So if we're looking at the total cost of leasing a car, there is one area where you could reduce expenses, and that's in maintenance, because often routine maintenance, like oil changes, is included in a lease agreement.

30:28Sean Pyles:So if someone still isn't sure if leasing or buying is right for them, what main factors should they be weighing on either side? Well, first consider your driving habits. Do you drive long distances that would put you over that mileage limit? As we've mentioned here several times, do you have kids or dogs that might destroy the interior of your car? You know, if that's the case, leasing may not be for you. And then think about your financial needs and priorities. You know, are you able and willing to make a higher monthly car payment in return for eventual ownership and a break-in car payment?

31:04Or are you most focused on your financial situation right now, which could mean leasing is the only way to get a car that you need to get to work at a payment that you can afford? And then the final thing would be your vehicle goals. We've kind of touched upon that. Some people just like driving a new car every few years. They want to try out a certain type of car before buying it. Leasing can be an easy way to do that. But in fact, as I said, you know, we recommend consumers, you know, that are new to EVs. It's a good idea to lease them before buying them since it can be a total lifestyle change.

31:44Elizabeth Ayoola:We have had a long, lengthy discussion about buying versus leasing. Shannon, if you were Patty, what would you choose? What option would you choose? If I really liked the car, I'd get a lease buyout loan and I'd keep it, you know, because I would already know how it drives. if I like how it drives, whether it's been maintained well. And, you know, really, as I keep saying, I like not having a car payment.

32:09Sean Pyles:Yeah, I'm in the same boat as you, Shannon. I want to get rid of my car payment as quickly as possible. So I'd probably choose that. Have either of you ever leased, Sean or Elizabeth?

32:16Elizabeth Ayoola:I have not, but I did consider it. But every time I go back to the points of, like you said, it's like eternally renting a car, I'm like, I don't know if this makes much financial sense for me if I can justify paying whatever the payment is, $500 to$800 a month for years on a car that I'm not gonna own in the end. And even if I was a little on the fence based on this conversation, I will not be leasing a car. I also will not be buying a new car, and I will be using that extra money to do all the things that Sean listed in the beginning.

32:47Sean Pyles:Like, buff out the scratches that your son put into your car.

32:50Elizabeth Ayoola:Listen, I'm not gonna lie. I'm one of those people who just jerks my car around. I don't know half of what the lights on the car mean. So it took me a long time to even notice the scratch was on the car. So clearly it doesn't bother me that much. So I probably won't be buffing the car now.

33:05Sean Pyles:Well, Shannon, thank you so much for coming on and talking about all this with us. Well, thank you for having me. It's always fun meeting with you too. Okay. And that's all we have for this episode. Shannon, will you please read us out? Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com.

33:34Elizabeth Ayoola:I'm going to tell you this very quickly because somebody in Sean's house wants a walk. We want you to join us next time to hear about using AI versus a real person for financial advice. Follow Smart Money on your favorite podcast app. That includes Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

33:53Sean Pyles:And for those who are only listening and not watching, my dog Pepper made an appearance and started licking my face because it's walk time here. All right. Here's our brief disclaimer because I have a dog to go walk. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

34:11Elizabeth Ayoola:This episode was produced by our fabulous team that includes Tess Vigland, Hilary Georgie helped with editing, Nick Chrisomy, and Eve Krogman help our audio and video production. And a big thank you to NerdWallet's editors for all of their help.

34:25Sean Pyles:And with all that said, until next time, turn to the nerds.

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