Lease vs. Auto Loan: Which Is Right for You?

You've found the perfect car, but that's only half the challenge. Now you have to decide how you want to pay for it. Leasing and purchasing both have their pros and cons, and it's important to understand them before deciding which is right for you. Here's what you need to know so you can make a decision you're happy with.

How auto loans work

Auto loans are similar to any other type of loan: You find a lender who is willing to back you. It then gives you the money for the purchase and charges you an interest rate that's determined by your credit history, the loan term, and market conditions. You might have to pay closing costs when you take out the loan, and then you make monthly payments for a number of years.

If you do this, you own the vehicle free and clear in the end. Fail to keep up with your payments and the lender can take it back from you -- commonly called repossession -- and sell it to get its money back.

Here's a brief look at the pros and cons of buying your vehicle:

Auto loan pros

• Generally cheaper over the long term, especially when holding on to the car after the loan term ends
• The vehicle is yours, free and clear at the end of the loan term
• Option to customize your car however you want
• No limits on how many miles you can drive

Auto loan cons

• Monthly payments are generally more expensive than leases
• Maintenance costs are the owner's responsibility
• Selling or trading it can be a pain

How auto leases work

Auto leases are essentially long-term vehicle rentals. You agree to borrow a vehicle for a set amount of time -- usually two to three years -- and during that time, you pay taxes, fees, and interest, plus the amount the car depreciates. This is generally cheaper than a loan monthly payment. Lessees pay about $143 less per month than loan borrowers on average, according to Experian.

But leases have rules. Drivers can't make any permanent changes to the vehicle, and they're also restricted to how many miles they can drive. Violating these rules or putting excessive wear and tear on the vehicle results in additional fees. Early termination of the lease can also carry a fee. And, of course, you'll still have to pay for things like insurance and tires yourself.

Companies typically offer leases on new cars, so there are generally fewer maintenance issues, and some leases may even come with free scheduled maintenance. At the end of the lease term, you can choose to purchase the vehicle or upgrade to a different leased vehicle.

Here are the pros and cons of leasing a vehicle:

Auto lease pros

• Cheaper monthly payments
• May be able to afford a newer, more expensive vehicle than you could if buying
• No need to sell it at the end of the term
• Free scheduled maintenance with some lessors

Auto lease cons

• You don't own the vehicle unless you choose to buy it at the end of the term
• More expensive than buying in the long run if going from one lease to another
• Potential for a bunch of extra fees if lease terms are violated

How to decide whether an auto lease or loan is right for you?

Whether to buy or lease your vehicle is a highly personal decision. When weighing the two, it's important to consider the short- and long-term financial implications of your decision. Monthly payments are understandably a huge factor in your decision. But you should also look at how much you'll pay in total over the life of a lease or loan.

To do this, you'll probably need to talk to a few lenders and lessors to learn what they can offer you. Review the terms of your lease or loan to make sure you're comfortable with them, and don't be afraid to ask questions if there's anything you're unclear about.

Finally, consider non-monetary factors, like the type of vehicle you want. If you're interested in a new vehicle that's too expensive for you to buy, for example, a lease might be a better option. Or if you have young kids you worry might damage or sully the vehicle, a loan could help you avoid paying extra fees for excess wear and tear.

Take your time and don't rush into a decision. Whichever way you go, you're locking yourself into several years of monthly payments, and that's not a decision to make lightly.