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Starting the new year with a new ride? Unless your stocking was full of cash during the holidays, you’ll have to decide whether to lease vs. finance your new car. Each comes with pros, cons, and insurance needs.
Leasing offers lower payments, but strict mileage limits and no ownership. Financing costs more per month, but you own the car outright and you can drive as far as you want. Lenders for both require full coverage car insurance, but leases mandate higher liability limits. Here’s how the two options compare to help you determine which fits your budget and long-term goals best.
Learn more: How does car insurance work? The basics explained.
Lease vs. finance: Your car buying options
The average new car purchase price was $49,766 in October 2025, according to Kelley Blue Book. Meanwhile, the average used car list price was $25,825. If you need a vehicle and you don’t have that kind of cash saved, your best options are to lease or finance a car.
Learn more: Cheapest car insurance
Leasing a car
When you lease a car, you’re essentially renting it for the long term. You’ll sign a lease agreement that specifies how many months the contract will last, the monthly payment, and a mileage limit. If you go over the mileage cap, you’ll be charged a per-mile fee.
There are a few key details you need to know as the lessee (the person leasing the car), before you sign an agreement:
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Capitalized cost: Sometimes referred to as the cap cost, this is basically the agreed-upon value of the car, plus the taxes, title, and registration fees, and any add-on protections you purchase.
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Lease term: The amount of time your lease will last. The average car lease term is about three years, though shorter and longer leases are available.
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Residual value: This is the amount the dealership estimates your vehicle will be worth at the end of the lease, accounting for typical car depreciation. It’s expressed as a percentage of the car’s MSRP. For example, if you sign a three-year lease on a $50,000 car and the residual value is 60%, the dealer estimates that your vehicle will be worth $30,000 at the end of the lease. Usually, this number isn’t negotiable.
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Money factor: This is essentially the car leasing term for the interest rate you’ll pay. Usually, this number is a decimal. To get the annual interest rate equivalent, multiply the number by 2,400. For example, if the money factor is 0.0020, you’d multiply 2,400 x 0.0020 to get an interest rate of 4.8%.
Once your lease period ends, you’ll typically have the option to return the vehicle, buy it, or extend the lease terms.
Learn more: Everything you need to know about car leasing and insurance coverage
Financing a car
When you finance a car, you take out a loan and make monthly payments until the loan is paid off. The car itself serves as collateral for the loan; if you don’t make your payments as agreed, your lender can repossess the vehicle. You’ll own your car outright once you pay off the car loan.
If you’re financing a car, make sure you know these things before signing a loan contract:
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Principal: The total amount you’re borrowing for your vehicle loan. This amount will often be lower than the car price if you have a down payment or trade-in.
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Interest rate: The annual cost you’ll pay to borrow money. The average interest rate on a 60-month new vehicle loan was 7.64% in the third quarter of 2025, according to the Federal Reserve Board. Your credit score is an important factor in the interest rate you’ll get.
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Total cost: The total amount you’ll pay for the vehicle, including the principal loan amount, taxes, fees, and interest.
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Loan term: This is the length of time you’ll have to pay off the loan. The average new car loan term was just under 69 months, according to Experian’s State of the Automotive Finance Market Q2 2025 report.
You can typically get a car loan from banks, credit unions, online lenders, or the dealership where you’re buying your vehicle.
Pro tip: The shorter the term, the higher your monthly payment will be, but you’ll pay less in interest over the life of the loan.
Learn more: Car insurance discounts: 17 ways to save
When it makes sense to lease
Leasing a car often makes sense if:
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You want lower monthly payments: Average car payments on a leased vehicle were $659 per month in the second quarter of 2025, Experian reported. New car loan payments averaged $682 per month in the same period.
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You like driving a new car: At the end of your lease contract, you won’t have any equity in the vehicle. That’s why leasing a car works best for people who keep their cars for only a few years and are OK with always having a monthly payment.
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You don’t drive a lot: A lease agreement limits you to a certain number of miles per year. A limit of 12,000 miles is typical. Beyond that, you could pay an excess mileage fee of around $0.20 to $0.30 per extra mile, depending on the car’s MSRP. For example, if you drove 10,000 miles over this limit, you could pay as much as $3,000. That’s why it’s best to avoid leasing if you have a long commute or you take frequent road trips.
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You’re hoping to avoid maintenance issues: Though you’re typically responsible for ongoing maintenance associated with a leased car, you’re driving it during the early years before major repairs typically become necessary.
Learn more: Most common types of car insurance explained
When it makes sense to get an auto loan
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You plan to keep the vehicle for a long time: If you want to keep your car for more than the typical three- or four-year lease period, financing a car is usually the better move. After you pay off your loan, you may be able to get several payment-free years out of your car.
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You don’t care about having the newest car: If you don’t care about driving a new car with the latest features, financing a car and keeping it long-term usually makes sense.
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You put a lot of wear and tear on your vehicle: In addition to an excess mileage fee, you’ll get hit with extra charges if the wear and tear on a leased vehicle is above the car manufacturer’s guidelines. If you rack up high mileage, drive in rough terrain, or have kids who might do some damage to the interior, financing your vehicle is probably wiser.
Pros and cons of leasing vs. buying
There are several pros and cons associated with leasing vs. buying a car
Insurance considerations for leasing vs. financing a car
Whether you buy or lease a car, you need an insurance policy that meets your state’s minimum coverage requirements. Most states require you to carry liability coverage for bodily injury and property damage you accidentally do to others. Some states have additional requirements, such as personal injury protection or uninsured motorist coverage.
Most lenders and car financing companies also require you to buy comprehensive insurance and collision insurance to protect their financial interest if you have a lease or loan on your vehicle. If you’re financing a car, you can drop these coverages from your insurance policy once you’ve paid off your car loan.
Canceling comprehensive and collision coverage puts your finances at risk, though, because you’d need to pay for the upfront costs of any damage to your vehicle out of pocket. If your car is totaled, you wouldn’t have an insurance check to help buy a replacement
You’ll need to keep your comprehensive and collision coverage as long as you’re leasing a car.
Some car leasing companies require lessees to carry liability coverage limits above the state minimums. If you need higher coverage limits because you’re leasing a car, you can expect to pay more for insurance.
You may also need something called gap insurance if you lease or finance a car with little money down. On a leased vehicle, gap insurance covers the difference between what you still owe on the lease versus the car’s actual cash value, or the amount the car is worth after factoring in depreciation. If you’ve financed a vehicle, gap insurance covers the difference between what you owe on the car and its current worth.
If you’re comparing the monthly costs of buying a vehicle with financing or leasing one, be sure to account for all expected expenses, including car insurance.
Read more: Everything you need to know about car leasing and insurance coverage
Lease vs. finance FAQs
Is it better to lease or finance a car?
Leasing a car may be better than buying if you only keep cars for a few years, you want a low monthly payment, and you don’t put major wear and tear on your vehicle. Buying tends to be the best deal if you keep vehicles for a long time and you want to build equity, or if you drive a lot and would go over the mileage cap on a lease.
What are five disadvantages of leasing a car?
The five main disadvantages of leasing a car are:
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You won’t own the car
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You’ll always have a car payment
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You’ll have a limit on mileage and fees if you go over
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You’ll pay several fees
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You typically can’t customize the vehicle
Does leasing a car affect your credit?
Yes, when you lease a car, your lease payments will be reported to the credit bureaus. On-time payments will help your credit score, and late or missed payments will hurt it.
Learn more: 10 tips to improve your credit score
What is the 1% rule when leasing?
The 1% rule when leasing a car is an affordability guideline that states your monthly lease payment should be about 1% of the vehicle’s MSRP. In other words, if you’re leasing a car with a $50,000 MSRP, your monthly payment should be roughly $500.
Is it more expensive to insure a car when leasing?
Insuring a car that’s leased is often more expensive than insuring a vehicle financed with a loan because leasing companies tend to have stricter insurance requirements. Though insurers won’t charge you more simply because you’re leasing a vehicle, it may cost more to meet your leasing company’s minimum coverages.
Tim Manni edited this article.
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