When you’re in the market for a vehicle and you’re not paying for it in cash, you’ll need to decide whether to lease vs. finance a car. Each option has several advantages and disadvantages.
A car lease usually comes with lower monthly payments than an auto loan. But at the end of the lease term, you’ll either need to buy the vehicle or lease another car. When you finance a car, you might make higher monthly payments, but they all go toward building equity. You’ll own the vehicle outright once you pay off your loan.
Leasing vs. financing can each make sense, depending on your preferences and financial goals. Here’s a road map of how leasing and financing compare, as well as the car insurance considerations for each.
Lease vs. finance: Your car buying options
The average new car purchase price was $47,962 in early 2025, according to Kelley Blue Book. Meanwhile, the average used car list price was $25,006. 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.
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:
Once your lease period ends, you’ll typically have the option to return the vehicle, buy it, or extend the lease terms.
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:
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.
When it makes sense to lease
Leasing a car often makes sense if:
Up Next
When it makes sense to get an auto loan
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 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 frequently asked questions
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:
-
You won’t own the car
-
You’ll always have a car payment
-
You’ll have a limit on mileage and fees if you go over
-
You’ll pay several fees
-
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.
Amy Danise and Tim Manni edited this article.