One of the many choices you would need to make in the car-buying process is to finance it or lease it. This choice is especially difficult because, in order to reach a decision, you would need to know your unique priorities. Like any other choice, there are pros and cons to both options, and making an informed decision depends on your needs and budget. With the growing selection of automobiles entering the market, the car-buying process can be overwhelming for most customers. Buyers must decide on the make, model, and color of their automobiles. In addition, customers must decide if they want to buy or lease their car. When it comes to car financing, customers have a number of options.
Financing a vehicle is best defined as paying for the automobile over time, and you get to own it once it is completely paid off. Typically, a finance agreement ranges from 24 to 60 months. A lease, on the other hand, is sort of a rental. A leasing agreement provides limited use of a vehicle for a certain number of months and miles, and at the end of the lease, the customer returns the car. The final thing to understand is that you need to compare finance rates in order to finance a car, and lease rates in order to rent a vehicle. Due to their longer lifespan, financed vehicles have a higher interest rate than leased vehicles. If a car is bought, the average monthly payments for financing are typically lower than leasing because individuals would own the vehicle.
Understanding Finance
Finance is a fancy term for taking out a loan and paying it back over time. Most Canadians use it as a way to buy a car. But when you finance a car, it doesn’t mean you shell out the cost for the vehicle upfront. Instead, you’ll make smaller payments each month over a predetermined loan term. At the end of it, you’ll have paid off the loan in full and outright own the car. The upside of ownership means you’re free to go off-lease any time you want. If you decide the car is perfect for your needs and want to keep it longer, there’s no issue with regulated kilometers or end-of-term inspections. Although ownership may bring peace of mind and freedom, it isn’t for everyone. Financing generally means higher monthly payments. Plus, other costs become your primary concern. Since Canada has tough winters and hot summers — and lots of road salt — the car’s body is subject to heavy wear and tear during an average lease. There’s no point paying a steep interest rate if you can’t make ends meet. Skip this strategy if it doesn’t serve your interests! Interest rates and loan terms make a massive difference in how much you pay over the long run. But they aren’t the only thing to worry about when it comes to financing your car. Take a look at how you plan to use the car and how these factors will suit future plans so you can make a decision for your long-term budget. After factoring the most significant determinants, think about your driving habits and lifestyle.
Definition and Basics
Financing is the act or process of supplying an enterprise or individual with money or capital. Basically, when someone finances a purchase, they have borrowed money and make payments to the lender for a set period, typically with interest on the amount borrowed. Financing a vehicle is one of the more common forms of consumer financing. The most common way to finance a vehicle purchase is to secure a car loan through a bank or credit union. In addition to bank and credit union vehicle loans, a person could also finance a car through a captive lender, like an automobile manufacturer or dealership. Financing has a direct impact on the total vehicle purchase price. Banks and credit unions charge interest to borrow the money to pay for the vehicle. For financing, banks and credit unions lend the money and require the loan amount and interest to be paid back over a certain period. Interest rates, also called finance charges, are typically higher than money market or savings account interest rates because of the risk presented. The elapsed time to repay the vehicle loan is called the loan’s term. Most vehicle loans have terms from 12 to 84 months.
The first step to determining this important number is figuring out how much money you’ll make in monthly payments on the car. The value of your monthly payment is a complicated figure to see based on how vehicle dealerships are paid commissions. For a car purchase, some agents are purely commissioned workers. It’s not in their favor to offer car loan options unless you want to finance every cent of the car purchase, except when they finance the deal through negotiations with a dealership financial director. In that case, you can finance much money for the car, even if it is typical for retailers to only require a finance charge on the price, meaning that you don’t need to apply for a normal financing car loan until you’re ready for the dealership to fall to a price you won’t accept.
Pros and Cons
Pros The biggest pro of financing is simple: you will own the car once the loan is repaid. After the final payment, the bank will issue you the title to the car, and you no longer owe anything to your lender. This appeals to many car buyers, especially those who love to hang onto their cars. Additionally, while you’re paying off your loan, a financed car can be upgraded and customized as much as you’d like, giving you more freedom than a leased car. The terms of the sale are also negotiable, and if the car is expensive, you might be able to work out a longer-term loan, which will result in lower monthly payments. Cons One big drawback to financing is that month-to-month payments are generally higher than lease payments. Though you are working to own the car yourself, that estimated car payment will be a financial strain if you have malfunctions, moving, or any other unexpected costs. While the financed car can be upgraded and customized for personal preferences, it doesn’t come risk-free. If you decide to sell and the car’s worth comes in less than you owe, you may have to pay off the remainder of the loan immediately before obtaining the title. Keep these pros and cons in mind as you look over each option. You may find that your personal opinion leans against the data and these reviews. If that’s the case, trust your gut. Cars are the second most used big purchase out there, so choose what’s best for you.
Key Considerations
Interest rates, loan terms, and the borrower’s credit score can significantly impact the financing process. Banks are usually willing to finance a new car at a lower interest rate compared to a used car. The term of the loan directly impacts the monthly payment; lenders are generally more forgiving with longer terms. Additionally, a better credit score can often afford the borrower a more attractive financing rate. When considering whether to finance a car, you should compare loan estimates from multiple banks or lenders to ensure you are getting the best financing rate that you can qualify for based on your credit score. It is important to also compare loan origination fees and other closing costs that lenders charge. It is generally good to do your due diligence and research individual rates before allowing the dealership to pull your credit and offer you financing.
To explore any options, whether financing is right for you, and if so, the loan terms that are best can depend on your goals. Before deciding whether to lease or finance a car, weigh your budget, lifestyle, and future goals. A lease option can put you in the vehicle that you might not be able to finance otherwise due to the higher monthly payment associated with a car loan. The low monthly payment of a lease will give you access to a car that would otherwise be out of your price range when purchasing. As a lessee, you might have to pay for excess wear and tear when turning the car in, which is hard for some people to budget for if they do not expect to keep a car clean and in good working condition. Even though monthly payments may be less than purchasing a car, there are other costs such as any damage or excessive wear and tear. In turn, the length of the lease and the option to purchase the car at the end of the term might mean a lengthier commitment and more obstacles to overcome before owning a car. Review the lease option, especially if your long-term goals lead you to getting a new vehicle prior to a full car loan term completion. Some questions to ask are whether it is better to lease or purchase, which can also have to do with insurance and sticking to a budget. Some cars are more expensive to insure due to make and model; go with a make and model that fits into your insurance budget. Remember to consider the various factors such as a vehicle history report to see extra hidden costs such as accidents or mileage. Some make more sense to buy and others to finance. Potential pitfalls of a lease can come at the end date if damages are more than the renter’s budget. Depending on the make and model, some cars are expensive to insure. Consider the lease option if finances are tight, but some cars are cheaper to lease. One of the final questions to evaluate is whether paying cash for a car is cost vs. financing or leasing. Does the car you can afford today have the value that will last as long as you intend to keep it? Consider your trade-in budget for the next car and related negotiations before factoring in a final payment. This is one for all budgets. If the vehicle depreciates slowly over a long period of time past the full finance term, this might not be an option as you look to the next vehicle. Some manufacturers have rebates if you buy a new vehicle, but your trade-in will not be as valuable. This is dependent on a fixed budget for long-term ownership. Is there a chance you might need a different car in the next five years or before the loan is finished? If so, would your budget for a new car be able to pay off a car loan? Always factor in the value of how much you will have in trade-in and how you want to negotiate for the next vehicle purchase. A lot of planning and predicting finance goes into car purchasing decisions.
The information provided is frequently changing. Continue conducting further research or verify information before making any decisions.
Exploring Leasing
If buying a car isn’t your top priority, don’t worry – there’s another option. Leasing helps you minimize your monthly costs and guarantees you won’t be stuck with the same vehicle for a decade. Our guide contains the good, the bad, and the implications of leasing a car. We hope that by analyzing our data, you will be able to determine whether leasing is appropriate for you. While half of car buyers consider leasing a poor option, a higher percentage choose it. Maybe you’re also part of a contingent that only uses cars for a few years before selling or trading them. That’s what makes a lease worthwhile. You only spend $312 a month more on average than you would if you owned your car. You may appreciate a break and update your vehicle to a newer model every couple of years. Special leases are increasingly common and provide a better value than buying a slightly older used car. Others believe that the desire to earn or lose a monthly lease has been overcome or that they just don’t like the concept of building monthly equity. If you only want to pay $200 to $300 a month for a car, you’re in luck. You can purchase a new car with a lease term of up to 36 months, making it the most affordable option for many drivers. If you purchase the vehicle, it is usually not a long-term option.
Definition and Basics
Leasing a vehicle is a way of using it rather than owning it. It lets people drive a new car for three years or so before it starts having problems, without the headaches of holding the car at the end of a traditional purchase. A lease contract is between a buyer and their leasing agent. It is in the best interest of both parties to understand the terms of the lease, and many buyers do not. Odds are you didn’t know the terms of your lease when you signed it. After reading this, you will be much more informed.
Everyone knows that in order to keep a car, you have to buy it. Most people who understand this tend to believe that leasing is “renting.” They think that they are required to give the car back at the end of the lease and sign a new contract to get another car. This is not leasing. Leasing is really the resale of the car to the dealer at a predetermined price. This price is called the residual value. The leasing contract transfers the rebate to the consumer, who pays the difference in price. The cost of transferring ownership is known as the money factor or the lease rate. The lease rate is related to the interest rate as follows: lease rate = money factor x 2,400.
Pros and Cons
When it comes to leasing, you can think of it as an extended period of renting a car from a dealership. In essence, when you lease a vehicle, you agree to make regular payments in order to be allowed to drive it. Since those payments are typically spread out over 36 months, with an option to either return the car or purchase it at the end, the number one benefit of leasing is reduced monthly expenses. Just keep in mind that it will cost you quite a bit in interest over that same 36 months if you choose to finance the purchase. Having a smaller down payment makes a lease substantially more attractive—a standard lease requires somewhere between a down payment at the time of signing, making it a better choice for cash-conscious drivers. Part of the draw of leasing is that the vehicles you drive are under warranty the entire time you own them. For a 36-month purchase, that means the car’s powertrain is covered for all of year one and two as well, thus allowing you to save in that amount of time due to non-existent maintenance costs. While at one point, this used to mean that it was a pain to upgrade to a newer model every few years, many transportation companies now cater to those who like to trade in regularly. Carmakers, in particular, understand that those who lease typically have brand loyalty, so in most situations this is not a problem. However, don’t jump at the first car that interests you just because of a low lease payment—trade-in values can sometimes be a shock, and nobody wants to be upside down. When considering vehicle purchase options, it’s important to understand both the positives and negatives of leasing. If you are someone who often quickly tires of the model you’re driving, or just like to have the latest and greatest, a lease makes much more sense than buying a car—a method that could take a decade or more for someone who isn’t wealthy. However, limitations may not make leasing a smart decision for those whose lifestyle choices disregard common mileage allowances and those who might want vehicle ownership equity in the future. So, this depends on how lifestyle limitations play the role of both car leasers and potential car buyers.
Key Considerations
1) Topic: Finance vs. Lease: Decoding Your Car Purchase Options
2) Section Title: Key Considerations
3) Section Summary: There’s more to leasing than making your monthly payments. Do not enter into a lease agreement without understanding the various aspects that can significantly affect you. Hire purchase or finance agreements typically cover a term of either 24, 36, 48, or 60 months, and it’s often the case that monthly payments on a shorter term are a little bit more expensive than over a longer term. Payment structures: the lease payments are structured based on the vehicle’s depreciation each month. When financing the lease, the amount of time over which the vehicle’s depreciation and the interest charges are spread is determined by the number of months in your lease. The longer the term, the lower the monthly installments.
Exit fees: all lease agreements carry an ‘unwind’ or early termination fee, representing an element of the lessor’s lost interest or lease payment. Note that this element will fluctuate over time based on how many installments have been made. Consumable or usage costs: some lease agreements have a clause where the lessor retains the ability to recharge unusual wear and tear or more commonly assess wear and tear at the end of the term and charge for consumption once the vehicle is re-leased or sold. If you are leasing the vehicle using the equipment for any business activity or usage, you can lease a vehicle on a Commercial Contract Hire agreement – the account rules and tax deductibility differ from those applicable to a novated leaseholder. Again, lease agreement terms will vary from lessor to lessor and should be thoroughly reviewed as they are different from financial agreements. When considering a lease option, ensure you carefully consider your annual driving habits and are honest regarding your needs when considering the number of lease-driven kilometers per year. Most lessors will charge for variance between 6 and 12 cents per kilometer over the term. Ensure you read and understand all of the agreement documentation. Know upfront what you’re getting into.
Comparing Finance and Lease Options
When considering car purchase options, most consumers are familiar with financing and leasing. One of the biggest differences between financing and leasing is ownership. When you finance to purchase a vehicle, you are working toward owning the vehicle—a form of equity build-up. When you lease a vehicle, you never build ownership or equity in the vehicle. At the end of the lease period, you can turn the vehicle back in, usually with a plethora of other options. The choice between both options should depend on what is most important to you and your financial circumstances. It is recommended to select the one with the lowest total cost. Either way, it is recommended that a decision to buy or lease should be based on overall purchase price and total ownership or lease costs and not solely on monthly payment.
The attached chart is an illustrative example that compares the costs of financing and leasing the same vehicle. The expected price of the vehicle at the end of this period is approximately $34,750. By comparing financing and leasing side by side, one trend stands out: over the short term, cost differences between financing and leasing are not significant. However, you have to consider that at the end of the lease, the dealer will expect the vehicle back to appraise and sell as a used vehicle or to auction. Also, find out what buying, leasing, and financing cost options are currently available in the market. Keep in mind that the options will vary by term and current dealer or manufacturer promotions, type of vehicle, and some options may also include a total consumer cost value which is equal to the current manufacturer rebates.
Cost Comparison
If you’re not quite ready to do your numbers or you’ve got a few more styles to consider, you can safely skip ahead to a helpful section. But for those of you who’d like to make today’s determining factor on whether to finance or lease, well, the “traditional” way of weighing the long-term costs is the “cost comparison” method. Here’s the lowdown: whether you finance your car or lease a car, you’re investing in transportation. So, let’s calculate the costs. On the finance side, consider the type of auto loan you’re going to get, your down payment, your monthly payments, how long you’re going to dwell in this vehicle, and the total amount of cash you will have invested when it’s completely paid for months or years later. On the leasing side, you’ll be taking into account the down payment, the monthly lease cost, the total lease cost for the term you choose, plus it’s sort of important to compare estimated residual value.
A lot of folks are all about the monthly payment, but it strikes smart finance specialists to include the down payment as part of the total expense – because it is. But, we’d be remiss if we didn’t remind you that all new car believers must include the cost of automotive insurance in their monthly budget, the cost of which can differ based on whether you finance or lease your car. Regular maintenance is another. If you’re not quite sure about these one-time costs, ask dealerships where you’ve been shopping for these additional expenses before you sign on the dotted line. In summary, the finance option is a long-term endeavor and can cost you dollars every month for approximately five years, and then typically a certain amount per month for a few more years. At the end of the investment term, it’s all yours. Generally, leasing is like a short-term fling with regards to time and money: you’ll have a lower payment than a traditional auto loan for three to four or five years, then when all is said and done, you can begin again as others fold in weary desperation. Family law aside, when the new lease charge ends, you can seek out another lease on another car, turning the responsibility over to the dealer. In other words, if peace of mind is worth a few extra bucks every month, finance – because it’s yours. Also, managing financial risk should be played on a personal level – where your instincts should rule. Go with your original hunch. It’s usually right.
Ownership vs. Usage
Ownership versus Usage
The car purchase decision is a unique one, as guidance given in favor of one over the other is very emotional and leans much more heavily towards the philosophical rather than clinical. This is a decision that ultimately comes down to who you are, and based on your personal values, lifestyle, and overall long-term strategy, one may be a better choice for you than others. It’s a simple way to break it down. For many, if not most people, the allure of ownership is its permanence and the equity it provides. Put another way, people know that there are things that will change in their lives, but this needn’t be one of them. Home is where the heart is, and the second you lay the dirt on that lease, it stops being quite as much your beloved castle.
There is a different philosophy at play when it comes to people who lease; this represents usage as opposed to committed ownership. Leasing arguably reflects a more transitory, fluid lifestyle, or at least a prudent bit of precaution. For instance, for individuals who are currently large and in charge with high income, can bring in paydays repeatedly, or who have previously bought out leases, they may also have a personal philosophy that says, “It would be nice to have a new car, and I definitely have the credit, but at the same time, my property tax is too high,” or even out of concerns surrounding child support because, under their state’s laws, the value of the car drives how much the support number will be, among other things such as alimony. Resist the temptation to view yourself as a “lease person” or “finance person” simply based on whether you lease or finance. For instance, a couple who has leased their entire marriage that turned into nearly $50,000 in unwarranted charges over the terms of the leases, ultimately waived by the makers due to errors and glitches have yet, at the end of the day, to finance one car. The truth is that the decision to finance or lease is both a short-term and a long-term strategy. This follows two trains of thought; which decision is best for you is really all about how you philosophically view ownership and usage. Picking the cheaper option that aligns with what you want to achieve is the best option, and whichever option you choose, you have to stick with it to get the most benefit. If it makes you feel better to refer to it as a frame-of-mind argument, please feel free to do so. The end result will still be the same.
Making the Decision
You have a car you want to trade, and you’ve been to the dealership, and you know the worth of your car. Or you don’t have a trade, and you’ve found a car you really like. You’re considering your options: take out a loan and finance the car, or lease it? Here are some pros and cons to help guide your decision.
It’s important to really evaluate your circumstances. First, be sure you’re going to be stable enough to make car payments for a few years. If you enter into a lease and then have a change in work or personal circumstances, you’ll have to pull together a large sum of cash to get out of the lease. Other circumstances could have you in big financial trouble. Ask yourself some questions. Do you depend on your car for your job, where longer availability of a car is imperative? Are you nearly finished with school or about to change careers? Do you now live in a large city and no longer use your car frequently? Have you considered moving to an area where parking and maintenance of a car are unnecessarily expensive? Any one of these motivations could be extra help deciding whether to finance or lease.
Whether you’ve come to a pre-owned car showroom or a new car one, there are always people who walk through the doors with their minds made up. That is, they’ve either decided they are going to finance or lease, and they don’t want to discuss the alternative. There is a right and a wrong way of making a decision, and not wanting to discuss an option because you’ve set your mind to it is the wrong way. It’s no different than buying shoes. You’d never buy the first pair you try on without seeing what else is out there. No one should come in and make a decision on a new vehicle after test-driving just one make and model. That doesn’t sound like someone who is really set in their decision. If it is the only option being considered, at least take the time to sleep on it and then come in the next day. Sometimes that little bit of time and reflection makes them consider the other option.
Personal Financial Situation
A person’s personal financial situation is a large factor in determining which option is best for them. Finances are unique for everyone, and there is no one-size-fits-all solution. A clear understanding of your own income and expenses, as well as any long-term and short-term debt, will allow you to make the right decision. Before moving forward with any plan to buy a car, you should have a clear budget laid out based on your take-home pay. Factor in all living expenses, such as groceries, car insurance, utilities, rent or mortgage, taxes, and any applicable state or city fees. You might even want to add some savings to the budget on a monthly basis for any emergency or future expense that may arise.
It is a reality that everyone should secure a vehicle they need with a financing option no more than what they can afford. By completing a budget and getting a true sense of what you can afford on a month-to-month basis, you can avoid committing to something that turns out to be too expensive in either the short or long term. Choosing the right car purchasing and financing option, whether a low lease payment, a low monthly payment with zero down, or a low-interest rate, requires all variables to be considered during the process. Always be aware of the total obligation that you will have on any lease versus any financing.
Driving Habits and Needs
Sub-section 5.2. Driving Habits and Needs
What you do today and what you need the car to do impacts how you ultimately buy and finance the car. – If you commute from home to work and back each day, the distance you drive on each trip may impact the warranty period after your purchase or lease ends. Both may play a factor in the total cost, so that is why I mention expected usage. – If you drive over distances that usually exceed 12,000 to 15,000 miles per year, whether for work or other purposes, planning to finance and put some money down will likely be the right choice. There are no hard and fast rules here, but you do need to consider these points. Now, if you drive a lot but usually in chunks of 60 to 150 miles a day, and only a few times per month, leasing will be less costly in the same regard. So, while you can go over 45 miles and rack up 35,000 miles in overage fees the first year, since you only use the car five to 15 times more in your downtime, you may stay under this fee; plus, leasing will always open the door to buying the car at lease end, which, if you plan to put a big dent in at once, will lower payments along the way and could bring down costs. This is the equity argument.
Depending on your habits, financing and putting money down up front might be the way to go, or it could bankrupt you.
