When you’re in the market for a vehicle and you’re not paying for it in cash, you might be wondering whether it’s better to lease or finance a car. Each option has several advantages and disadvantages.
Whether you choose to lease or finance a car usually depends on your preferences and financial goals. Here’s a roadmap of how leasing and financing compare, along with the car insurance considerations for each.
Learn more: How does car insurance work? The basics explained.
Lease vs. finance: Your car-buying options
The average new car purchase price was $49,200 in May 2026, according to Kelley Blue Book. Meanwhile, the average used car list price was $26,918. 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 generally be charged a per-mile fee, which is often between 10 and 25 cents per mile, though some leases charge more.
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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Amount due at signing (DAS): While leasing companies don’t typically require a down payment, you’ll usually need to pay some upfront costs when you sign the lease. This is typically called the amount due at signing (DAS). Costs can include your first month’s payment, taxes, registration fees, and acquisition fees.
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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 the financing charge used in a car lease, similar to how an interest rate works on a loan. It’s usually expressed as 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 estimated APR 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 vehicle’s purchase price if you make a down payment or trade in a vehicle.
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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 7.52% in the first quarter of 2026, according to the Federal Reserve Board. Your credit score is an important factor in the interest rate you’ll get.
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Down payment: While it’s not always required, putting money down on your vehicle can help lower the amount you finance. Generally, the more money you put down, the less you’ll need to borrow, which can also help reduce your monthly payments. While there’s no required down payment, many financial experts recommend putting at least 20% down on a new vehicle, if possible. A larger down payment may also help reduce the risk of owing more on your loan than your vehicle is worth, also known as being upside down on your loan.
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Total cost: The estimated total amount you’ll pay for the vehicle, including your down payment, loan principal, 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 about 69 months, according to Experian’s State of the Automotive Finance Market Report: Q1 2026.
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 loan term, the higher your monthly payment will typically be. However, you’ll usually pay less in total 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 $619 per month in the first quarter of 2026, Experian reported. New car loan payments averaged $770 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, depending on your lease agreement. For example, if you drove 10,000 miles over this limit and your excess mileage fee was 30 cents per mile, you could pay as much as $3,000. That’s why it’s typically 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 routine maintenance on a leased vehicle, you’ll usually be driving it during its early years, before major repairs are commonly needed. The manufacturer’s warranty also covers many new leased vehicles for most or all of the lease term, which may reduce your out-of-pocket costs for covered repairs.
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 may be the better move. After you pay off your loan, you might be able to get several years without a car payment.
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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 goes beyond what’s considered normal under your lease agreement. If you rack up high mileage, drive on rough terrain, or have kids who might do some damage to the interior, financing your vehicle is probably the wiser choice.
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
If you’re comparing the monthly costs of buying a vehicle with financing or leasing one, it’s important to account for all expected expenses, including auto insurance. Insurance requirements can vary depending on whether you lease or finance and where you live. Understanding those requirements in advance can help you better estimate the true cost of each choice. Here are a few things to keep in mind as you make your decision.
Meet your state’s minimum insurance requirements
Whether you buy or lease a car, you’ll 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 cause to others. Some states have additional requirements, such as personal injury protection or uninsured motorist coverage.
Comprehensive and collision coverage requirements
Most lenders and leasing companies also require you to carry comprehensive insurance and collision insurance to help protect their financial interest while you have a lease or loan on your vehicle. If you’re financing a vehicle, 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 have to pay for the upfront costs of any damage to your vehicle out of pocket. If your car is totaled, you wouldn’t receive an insurance check to help replace it. If you’re leasing a vehicle, you’ll generally need to keep your comprehensive and collision coverage as long as you’re leasing a car.
Leased vehicles may have stricter insurance requirements
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 usually expect to pay more for insurance.
Gap insurance
You may also need something called gap insurance if you lease or finance a car, especially if you make a small down payment or your vehicle depreciates quickly. On a leased vehicle, gap insurance covers the difference between what you still owe on the lease and 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.
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 usually don’t put major wear and tear on your vehicle. Financing tends to make more sense if you plan to keep your vehicle for a long time, you want to build equity, or drive enough miles that you’d likely exceed a lease’s mileage limit.
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 may pay fees if you go over.
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You’ll pay additional 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 are generally reported to the credit bureaus. On-time payments will help your credit score, and late or missed payments will usually hurt it.
Learn more: 10 tips to improve your credit score
What is the 1% rule when leasing?
The 1% rule for leasing a car is an affordability guideline stating that 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 leased car 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, you may pay more to meet your leasing company’s minimum coverage requirements.
