Should you buy or lease a car? Here's how to decide

Whether it's better to buy or lease a car is an age-old question. Making that choice may be especially challenging considering vehicle prices and interest rates have been on a wild ride since 2022.

According to Experian data from the first quarter of 2023, the average monthly payment on a new car loan was $725, compared to $586 on a car lease. At the same time, used cars were the easiest on consumers' monthly budgets with an average payment of $516.

However, monthly payments don't tell the whole story. It's best to make the buy-or-lease decision based on your priorities and personal circumstances. Below, CNBC Select outlines situations when it's smarter to buy and, separately, when it's smarter to lease.

Buying a car instead of leasing is typically a sound financial choice. Or, it may simply be a better fit for your driving habits and preferences. Here are a handful of situations when you might want to purchase a car.

You're focused on long-term value

When you're buying a car, you're investing in an asset, albeit a depreciating one. Unless you're buying in cash, you'll need to take out a car loan and pay interest — but in return, you'll be gaining ownership of the vehicle. You can sell it or trade it in at any point and pay off the remainder of the loan (if there's any). Even better, once you pay off the loan, you can keep driving your car without worrying about monthly payments.

If you're leasing, you may be paying less for the same car on a monthly basis, but you won't own it. Leasing to buy also doesn't guarantee a good deal. When buying, you can always negotiate with the dealer and auto loan lender to bring monthly costs down. Lowering the purchase price will result in savings, as will shopping around for the lowest interest rate on a loan. CNBC Select recommends PenFed Auto Loans for affordable rates — plus, it offers a car-buying service with prequalification and cash incentives. Another great option for rate shopping is myAutoloan, which has low minimum credit score requirements (at least 575) and allows co-borrowers and co-signers.

You're planning to drive the car for a long time

If you're the type of person who gets attached to a car and drives it into the ground, buying is arguably an obvious choice, both personally and financially.

With a long-term lease (over 36 months), you may have lower monthly payments compared to a shorter lease, however, the car's value is likely to plummet after this period, meaning you'll be overpaying without the advantage of gaining any ownership.

You have 10% to 20% to put down

It's generally recommended to have a down payment of at least 20% if you're buying a new car and 10% for a used one. This will help you ensure you'll get a lower interest rate and lower monthly payments. Plus, you'll be less likely to end up "underwater" on your loan (or owning more than your car is worth).

Understandably, 10% or 20% can be a large sum to come up with. A car lease doesn't require a large down payment. And if you have good credit, you might not even have to put down any money at all. You can check your score that auto lenders are likely to use (the FICO® Auto Score) by signing up for for one of the FICO® Basic, Advanced or Premier credit monitoring services. Each of the plans includes 28 versions of your credit score used by different types of lenders, including car lenders.

You drive a lot

If you have a long daily commute or drive a lot for any other reason, purchasing a car might be a better idea.

Usually, under a leasing contract, you'll have a mileage limit of 10,000 to 15,000 miles per year. If you exceed the limit, you can be charged over 20 cents per each additional mile you put on the car. Needless to say, these charges can add up rather quickly.

You want to customize your car

For some drivers, it's a priority to make their car feel like their own by customizing it. When you're buying a vehicle, you're free to do with it as you please, from adding a turbocharger, to painting your car neon green (a questionable choice — but you have every right).

A leased car isn't likely to allow you such freedoms. While your lessor might agree to certain modifications, you'll still need to return the vehicle to its original state before bringing it back at the end of the lease.

Leasing a car is similar to having a subscription with an end date. You can use the vehicle for as long as you're paying for it. And although not building any equity in the vehicle may be a drawback, a car lease can still be a better option in certain scenarios.

You're set on always driving a new car

Without a doubt, new cars are appealing. You get the sleekest design, the latest technology and that delicious new-car smell. If these things are priorities for you, you might want to consider leasing.

Just remember that even with leasing, there are time constraints. If you sign a three-year lease, it's best to drive the car for the entirety of those three years. Breaking the lease early can lead to termination fees. According to the Federal Reserve Board, the fee is normally the difference between the remaining balance on the lease and the credit for the current value of the car, as detailed in your lease. For example, if the balance on your lease is $20,000 and the vehicle's value is $17,000, the lessor will charge you $3,000 in termination fees.

If legal in your state and permitted by your lease, you can also transfer your lease to someone else to avoid the fee. That said, you might still have to pay a lease transfer fee and other charges.

You can't afford a shorter-term loan

Some car loans can be as long as 120 months (or 10 years). Longer loans may come with lower monthly payments, but in the long term you'll pay more in interest. Plus, the longer you keep the vehicle, the more value it will lose, thanks to depreciation and the miles you put on it.

A long car loan can lead to negative equity in your vehicle where you owe more than it's worth. This can make it difficult to trade in or sell your car without paying off the loan first. Not to mention, if you total it, your car insurance will only pay up to its current value, leaving you with debt for the vehicle you can no longer drive.

For these reasons, if you'd have to take out a loan longer than 60 months (five years) to buy a car, a car lease is a good alternative.

You don't want to worry about maintenance issues

With a lease, you're only keeping the car for a few years — and those are the years the vehicle will be in its best condition.

Most new cars have bumper-to-bumper warranties typically long enough to last through a lease, meaning you'll have coverage to repair most car parts and systems in case of mechanical issues. Additionally, car lease agreements often come with routine service included in the terms, allowing drivers to save on regular maintenance.

Still, make sure to keep your leased car in the best condition possible since you'll be responsible to pay for wear and tear, such as scratches, dents or a stained interior.

Over the long run, continually leasing is more expensive than buying a car. Plus, purchasing a vehicle allows you to build equity in an asset. At the same time, there are situations where leasing still makes sense — after all, it's usually easier on your monthly budget. Take your time to weigh your priorities and do the math to determine what works best for you.

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