A choice frequently presented to a consumer upon acquiring a new car or a new car payment is whether to lease or finance the car. Call it a lease or a car rental; it means the same thing with just a few differences. Some companies provide lease specials that are too good to be true. Advantages of a lease include: future value is determined; in essence, you are just paying for using the vehicle, not for the entire vehicle itself, lower monthly payments, and very little to no maintenance costs. Today’s auto lease choices have grown beyond the scope of a traditional lease with new and innovative ways to lease.
When it comes to getting a vehicle, you’ll be put in a position to make a decision pretty much right on the spot. Leasing vs. financing? Leasing gives the ‘lessee’ (that’s you) financial flexibility and a lease term that allows for the option of owning at the end of the term. Then again, you can simply turn it in and walk away. Financed vehicles, on the other hand, over time begin to get cheaper to own due to the lending having been paid in full. One important question you need to ask yourself is, ‘How many years do I intend to drive this car?’ If you’re the type that likes a new car every two to three years, leasing might be a more cost-effective way to drive. Of course, if you drive a lot of miles, you’ll need to read the section on additional costs.
Understanding Leasing and Financing
Leasing and financing are both ways for you to get the car of your dreams. With leasing, you “rent” the car, taking on many of the benefits of ownership without becoming the vehicle’s sole proprietor. Financing the car means that the lender takes all the risks and you take all the responsibility. When you lease, you agree to pay a flat rate at regular intervals in return for the use of the vehicle for a predetermined length of time. Your duties are outlined in the contract, and you must keep a variety of stipulations in mind when you sign on the dotted line. This is the only way to use the car, and you have no right to sell or modify it without the lender’s permission. Once the lease is up, you can return the car to the dealer, pay off any outstanding obligations, and either leave the premises or lease or purchase another vehicle from the same business. Parting with the car now will not give you anything, but you could benefit in the long run by taking out a new lease or purchase contract on a more recently manufactured or refurbished vehicle. If there are damages, you might end up owing the dealer anything or even losing your deposit, but if you get a “wear and tear” package and drive the specified number of miles or fewer, you would have nothing more to pay the dealer when your lease expires. When things work out, you come out on top and leave with nothing to show for it except memories and the stuff you’ve bought and incorporated into the car – and maybe some moderate wear and tear.
Pros and Cons of Leasing
While there are many reasons to lease a car, it may not be the right choice for everyone. Below are some of the pros and cons of leasing a car. Leasing can be cheaper. Monthly lease payments are often lower overall than monthly loan payments for a new car. In addition, you generally will pay less in sales tax. You can drive a new car every three years. Lease terms are usually two to four years. This provides the potential to drive a new car every couple of years. So, if you like to have a new ride every few years, leasing is cheaper in the long run. Your car is always under warranty. This will prevent expensive repair costs. Low or no down payment. You have a fair chance to get into a new car lease with a small down payment, and in some cases, no down payment at all. Luxury brands typically offer lower down payment lease deals.
The car is new and generally has the protection of a warranty. Car owners often face costly repair bills. Breaking a lease can be very expensive. If you want to return your car before the lease term is up, you are likely to pay a substantial penalty. Length restrictions. A lease contract will generally limit the number of miles you can drive in a year. Excessive use charges can mount for people who are driving more than the restricted amount. You will always have a car payment. If you finance a car for, say, 60 months, you will eventually pay off the loan and be left with a car that is completely paid for. If you lease a car, you will always have a car payment since a lease dictates that you return the car at the end of the term. You don’t own the car. Eventually, a loan will end, and you will own the car free and clear. When a lease term is up, you own nothing. It is possible that leasing a car will be more expensive than buying one in the long run. So read the leasing contract over carefully and consider your personal budget. If leasing a car is not working out, you can return it.
Advantages of Leasing
Among the many advantages of leasing a vehicle, the one that appeals to the most people is the lower monthly payment. This reduction can be quite significant and can help you afford a vehicle that is more expensive than you might be able to afford through financing. People who like the thought of driving a new or different car model every couple of years may also be drawn to a lease situation, in which you can easily trade in a car after the lease term is up and hop into a different one. People who are hesitant to lease sometimes bring up the fact that, while there are clear benefits to lower monthly lease payments and a lower interest rate, you are essentially renting a car and cannot build equity in the vehicle itself over time.
However, there are potential financial benefits to leasing a car. Since new cars are usually still under warranty, you will not encounter many maintenance issues within the leasing term, and your short-term lease means you can always have a newer car with the latest features. Brand new cars come with updated technology that saves you fuel, includes the latest safety features, and is overall likely to run more efficiently. In terms of operating costs alone, a car lease can indeed cost you less than an outright purchase where you have to deal with a monthly car loan payment, fuel, car servicing costs, and more. There is also the potential for tax benefits as you can often write off a percentage of the lease payments if you’re using a leased vehicle for certain types of business services.
Disadvantages of Leasing
Mileage
A majority of the leasing drawbacks are based on situations that involve exceeding terms of the lease. A common restriction that might add fees at the end of a lease is mileage limits. A lessee who drives more than the limited miles on their lease can expect to pay somewhere around per mile. For example, if a lessee drives over their lease, it could cost approximately at a mile. While they could run a profit if they bought the vehicle and then sold it, they can hold onto the equity only by buying it for fair market value or the specified residual price at the end of the term.
Ownership
Without ownership, lessees can’t hold the vehicle or its equity as an asset. When people say “drive as though it’s your own,” it’s difficult to make choices when you are bound by an agreement that could hit you hard for modifications or early termination. Financing a used vehicle may be a better choice and more practical than leasing a new model. A future woodworker or painter at the art school would possibly want to avoid a leased vehicle with its restrictions. Financing a car would allow them to drive as many miles as desired while also adding modifications to make the vehicle uniquely their own. Only then would they have equity in the vehicle and be able to sell it when they are ready. They could only lease if they agreed to leave the car in stock condition and agreed to its restrictions. When discussing leasing versus financing, these are the types of points that need to be addressed in order to make the best decision for the individual.
Pros and Cons of Financing
Once you’ve paid off the loan with interest, the vehicle is legally and solely yours. This typically leads to the strongest selling point for financing a car – the pride of ownership. Once you own your vehicle, you can drive it till the wheels fall off or sell the car at any time and use the money you make as a down payment for another vehicle. You’re also free to customize the vehicle however you like with custom paint jobs, decals, performance parts, etc., without worrying about a lease agreement’s wear and tear stipulations. But while ownership brings flexibility, there are a few drawbacks to consider. The first is the aforementioned monthly payment, which is typically much higher for financing a car than the equivalent lease payment, meaning a financed vehicle buyer is either paying more each month or forced to buy a less desirable vehicle due to the higher payments. Down payments of 10 to 20% of a vehicle’s price – greater than the standard 20% financing banks require – are also common, with additional expenses such as interest over time and maintenance. Odometer caps also do not exist for car loans, which are built into lease agreements. Like leasing, financing a vehicle serves as a reasonable option for specific car buyers. However, before reaching a decision on which car acquisition method is right for you, be sure to take in its pros and cons so that you can show up to the dealership ready to make an informed decision.
Advantages of Financing
From a passionate writer going through adulthood smoothly to other young adults who can relate!
Considering financing? Here are four advantages to think about.
Here are some of the advantages of choosing financing for your next vehicle.
Ownership: At the end of your auto financing term, whatever money was lent to you has been paid off and the car is completely yours. There can be a sense of accomplishment and confidence in owning your vehicle because of the financial equity building up. Car owners can freely make alterations to a vehicle that is totally theirs because they can choose what they wish to do with it.
Money savers: Instead of multiple car payments on various cars over the years, a financed vehicle might be cost-effective in the long run when the unpaid loan term surpasses the time period of the standard lease term. The more value retained by the car, the less depreciation will matter. Additionally, potential added value from the simple modifications owners are allowed to make includes truck bed liners for use as mobile campers or transitions from town car to sports vehicle. When considering this financial option, note that a dealership may offer different pay schemes and loan rates, and it’s likely best to consider all options.
Disadvantages of Financing
Higher monthly payments: Monthly car loan payments are typically higher when a vehicle is financed and purchased. This is due to the fact that the borrower will be responsible for paying off the full purchase amount, as indicated in the loan agreement. The expenses do not include the loan interest or any additional financing charges, all of which raise the monthly payment. Those with small or moderate incomes may be uncomfortable managing higher monthly car payments. Interest and additional financing charges will also accumulate, exacerbating the financial stress. If advanced financing is applied to the loan interest, the full expense of the loan can be significantly increased.
Down payment: Even though it is possible to find auto loans for those with no credit or a low credit score, in most circumstances, buyers with no decent credit will need to make a down payment. A down payment is a sizable lump sum that is paid upfront. It can be a substantial amount of cash, which can be problematic for those who are just starting to manage finances with a lower income, do not have much money, or those who are battling high living costs, such as other debts or parenting. It is easy to get discouraged when shopping for a new car and to not bother saving for a sizable down payment. In a few situations, the amount of the down payment is left to the discretion of the buyer, though the dealer will review the average percentage contributions that other clients have saved for down payments.
Factors to Consider When Choosing Between Leasing and Financing
Leasing vs. financing a car is a decision many people face. There are several factors that can determine which option is right for you. One of the most significant factors is your budget. Monthly lease payments are generally lower than finance payments on the same car, but ending a lease before completing the entire term might result in significant penalties. Leases also typically require a larger down payment and/or security deposit compared to financed vehicles. At the end of a finance agreement, you own your vehicle outright and can continue driving it without making any more payments except for maintenance and insurance. Also, you have the flexibility to trade in your car if you’re looking for something new and want to use the remaining equity in your car towards a new ride.
Your car is an asset that will depreciate over time. Whether you have a financed car or are leasing, you always have to be aware that the value of the car you are driving will always be less than what you paid for it. However, at the end of a financed agreement, your car is yours to do as you please with. Some drivers see this as the ultimate goal, to own their vehicle outright. Many leases are subject to annual mileage limits. If you exceed the limit stated in your contract, you will have to pay an additional charge. This means that if you travel a lot for work or if your residence is located far from where you work, you might want to consider purchasing. Finally, it is important to look at the end-of-term options for both leasing and financing. This can affect your long-term vehicle needs. Always plan ahead.
Budget and Monthly Payments
Your purchasing power is the prime driver behind financing a car. Do you prefer the more affordable monthly payments to build your budget? Leasing is the right choice for you. If you’re looking for the lowest total price over the car’s lifespan and want to structure payments simply and affordably with no financial obligations at the end, car financing is likely the better choice than buying. With the average price of a new car nearing a significant amount, many consumers can’t afford to pay it off in one lump sum. A car loan plan can ease financial strain while allowing you to finance without any emotional or financial stress.
The typical payment structure of a lease comes with lower monthly payments compared to a financed car, which is certainly attractive to a budgeting consumer. Most car leases require only the first month’s payment to be made at signing, and some require nothing at signing. For those less forgetful, spreading out large down payments or skipping them altogether may help offset an array of initial lease signing fees such as security deposits and a vehicle acquisition fee. Finally, if you ultimately decide that ownership is paramount and you need to escape your lease early with a minimal pass-through to your finances, a lease can force you into a strict budget constraint you might not like. In-built or regular non-ownership charges such as disposition fees assessed at lease-end or excessive wear-and-tear charges can hit the pocketbook especially hard. Don’t assume these can amount! Take a hard look, especially for dispositional charges, at your budget. If your target budget can’t support these lease endings, you should either budget for them or think twice about leasing.
Ownership and Equity
In a like manner, when you finance a car, you gain ownership of the vehicle following the last payment in your contract. Unlike leasing, which only provides you with the option to return the car and walk away, financing allows you to use the car, make payments with the goal of growing equity, and eventually own the vehicle outright. By owning a vehicle, it is common to believe you have an asset that could have some cash value should you decide to sell or trade it in the future. For this reason, we typically say that the best time to get out of the car market and begin growing equity in another vehicle is the point at which it is paid off – that way, your monthly payments will simply be saved instead of used to cover the cost of a depreciating asset. This is an important mindset to account for when deciding whether financing or leasing is right for you. If you do decide you’re going to purchase a new vehicle, consider how long you plan to keep it. If owning a vehicle that is paid for and has no monthly payments ahead is an asset you find of value, then financing the car could be your best route. If you don’t place great value in long-term equity, monthly payments and the highest likelihood of switching cars in three to five years might be best for you. When you lease, you don’t own any of the car. At financing’s onset, a portion of car ownership is yours; that is your equity or vehicle ownership. Financed borrowers increase their ownership in increments over time until, at the end of the loan, the vehicle is theirs outright.
Mileage Restrictions and Usage
Leasing a vehicle carries significant milestone restrictions and will charge for each mile driven past the agreed limit. These charges also vary in price but can range significantly for those racking up miles quickly. Per-mile charges are typically between $0.10 and $0.30. If you think you’ll put 20,000 miles or more annually on your vehicle in three or more years, you could save money by owning the car through financing versus driving a leased vehicle. Also, one of the perks of vehicle ownership is having the freedom to use the car for whatever responsibilities you have throughout your day. When customers under lease return a vehicle, it’s not uncommon to be penalized for going over the mileage limit on the agreement. However, mileage guarantees are very fluid, and there’s no fixed standard that says you should “never lease your car if you drive more than xx miles a year.” Instead, your choice between financing and leasing may more so depend on how you spend your miles.
It’s crucial to understand your mileage habits before making a decision. If any of the following frequently apply to you, leasing may not be the right option. First, leasing may not be right if you commute often. Leases are not ideal if you like to take frequent road trips. Even if you think you “won’t drive that much,” it’s a slippery slope: even just a few more miles can cost you a surprising amount more in lease-end fees. In these cases, financing your purchase might be ideal over leasing your car since it won’t impede your enjoyment. Also consider a car purchase over a lease if you are interested in vehicle ownership for the long haul. If vehicle ownership is for you rather than a revolving door of car rentals, a lease may not be for you.
Maintenance and Repairs
Whether you choose to lease or finance a vehicle, you will be responsible for repairs, maintenance, and regular servicing. While you lease, however, the car will likely remain under warranty, cushioning your wallet from expensive out-of-pocket repairs. After you finance and the car falls out of warranty, maintenance and repair costs can pile up dramatically, which may have a significant impact on the vehicle’s overall cost of ownership. Behind the wheel of a leased vehicle, manufacturers are often more lenient about scheduled servicing requirements. Not to mention, the affordability of a lease can promote less cost-conscious behavior, and the need for a reliable, modern automobile can prompt lessees to remain compliant with detailed maintenance schedules. More worrying than the brake pad replacement is forking over for a control arm assembly before the car has been paid off. Unexpected repair bills make leasing more attractive for the financially insecure.
Financed vehicles have been proven to have higher maintenance costs as they age, which worries some consumers. With financing comes the flexibility to decide how long the vehicle’s maintenance should be affordable. For some, this kind of flexibility is favored. Know your comfort level, as it can make a difference in your experience with car ownership or leasing. Management of maintenance and repairs is a key responsibility that varies significantly between the two methods of ownership. Adjustment for each vehicle, trimming costs where possible, should be the primary focus of car ownership, be it financing or leasing. Personal behaviors and finances often inform a person’s decision. Peace of mind is advertised through purchasing a leased vehicle, while ownership is praised for its adaptability. Mapping out vehicle expectations and behavior should be the biggest determinant of which car you choose to drive.
End-of-Term Options
With a lease, you know that at the end of the lease term, you will need to return the car. Plan to get another car at that time. With ownership, after you pay off the car, you have two choices. You can keep the car, or you can sell or trade it. The way that you take title to a vehicle affects how you can take the proceeds of a sale. If you take title as you do when leasing, you need to buy or lease a vehicle when utilizing the proceeds from the sale of your old vehicle. If you take title as with financing, you are free to do whatever you want with the proceeds.
These options can affect your overall costs. These options can help you reflect on what you want to do with a car and how long you want to keep it. Planning for any end-of-lease options and whether or not to buy a leased vehicle can provide insight into total costs and can help you make the best financial decision at lease end. These options can also be part of a deal thinking strategy or financial analysis. Moving from one car to another many times may be more cost-effective than owning a car over many years. Parameter values that are important in any of these decisions include your perception of the real interest rate, the monthly lease payment, the typical number of months you will keep a car, and the residual value of a car at the end of the term. The scenarios, results, and conclusions can help with purchasing choices and financial planning.
Making the Decision
Now that you have considered the benefits and drawbacks of both car leasing and car financing, it is time to make a decision. The first and most important thing you need to do is assess your situation. What works for your friend, brother, or coworker may not necessarily work for you. Assess your needs and financial capabilities to help you come to a conclusion. Once you have done so, seek a financial professional for additional advice, if needed. A financial professional can provide another opinion based on your unique circumstances and can assist you with any additional questions you have. Also, consider the decision you are about to make carefully. It is not always easy to get out of contracts early, and there may be hidden fees that apply. Lastly, conduct some additional research. Look into the costs associated with traditional financing and leasing, consider the resale value of vehicles, and ponder how long you intend to keep your car.
Once you have considered your personal situation, weigh the total costs. Will your monthly payments be less if you lease a vehicle? Are you able to have a new car every couple of years? What sort of warranty does the vehicle have? Once you have answered some of these questions, you may want to refine your analysis based on the findings. Sometimes, evidence changes regarding the benefits or disadvantages of each alternative. If you qualify for a traditional car loan, carry out the exact steps mentioned. Apply for the amount you are comfortable with and address any questions to a representative. If the idea of leasing still interests you the most, seek professional help. Any dealer can quote you the most month-to-month affordable lease at the longest term, but only a handful of people can tell you exactly what your buyout option will be. After the dealers have provided all the lease terms, request the residual value or the actual buyout price at the end of the lease. Be sure to ask whether the advertised buyout price for the car applies if the car is to be purchased before the lease ends. If so, circle this in your lease agreement.
Assessing Your Needs and Priorities
Prior to choosing between leasing or buying, everyone should consider various aspects, including their typical driving needs, current and future financial situation, future plans in relation to car ownership, and finally, their individual preferences and priorities. Each of us has separate needs and motives driving us to attain our ‘chosen’ vehicle. The available budget, lifestyle, and aspirations of someone who drives a high annual mileage, covering lengthy commuting distances, are indeed different from those of someone interested only in the car as a means of transportation for their weekend escapades. By becoming more aware of your individual needs and the related potential motives, you will be prepared to make a more informed and ultimately satisfying choice.
The following checklist provides an effective means of comparing leasing with financing and can be employed not only when one is deciding between the two but also when pondering whether to purchase or lease a vehicle. It is a subjective list emphasizing that one’s feelings count; the choices that a person makes often hinge upon their vision for the future. On the other hand: ‘Is there a risk my lifestyle will change over the next few years, making it easier or more suitable for me to free myself of car ownership?’
Comparing Total Costs
Comparing total costs is extremely important when considering if you should lease or finance. This is normalized over the term “total cost of ownership.” This is not just about an interest rate or the monthly payment, but also includes factors such as insurance, taxes, potential tax savings, anticipated maintenance and repairs, fuel costs, and, when you sell the vehicle, the all-important consideration of the vehicle’s depreciation and resale value. You need to do a thorough, long-term, and fully burdened comparison of total costs over your term. Leasing: The typical person says, “I only pay $X per month to lease while buying/financing costs $Y per month.” But let’s look at the whole picture. Leasing is tantamount to a long-term rental. You are paying for a vehicle’s depreciation, or “used up” value, as well as its cost of use. You make payments for the percentage of its value you will consume over the lease term (the vehicle’s full price minus its estimated residual value at the end of the lease). Over a 36-month term, you use up an average of 40-60% of a vehicle’s value through repayment, depending on the lease or other financing terms you agree to. Financed Purchase: Buying/financing costs include your interest (over 36, 48, 60, 72, or even a 96-month period), as well as principal repayment, your insurance, and your anticipated maintenance and repair costs, and taxes. You are financing the full price of the vehicle, plus interest, minus what you pay down, including taxes. In some cases, your finance charges may be a tax deduction, because you may be able to write off the interest paid. You need to compare the total cost of these two financing methods over the same term. If cash purchase, you still need to compare a “cash” purchase price to the investment cost of leasing or financing to determine if you can earn more by investing rather than paying cash to own, or if you need to use your cash to reduce other high-interest expenses before paying cash to own.
Consulting with a Financial Advisor
Another great tip is to seek the assistance of a reputable financial advisor when making the decision between leasing and financing a car. A financial advisor can help a person explore all car-related financial possibilities. You see, every car deal is affected by a consumer’s particular financial situation, and advisors have the expertise to take that information into account and make car-related financial recommendations accordingly. Financial advisors can help consumers make sense of complex financing and leasing terms that aren’t easily understood. They are very experienced in identifying lingering negative consequences down the road from today’s lease or financing decisions. A consumer might overlook a potential major financial problem, but their advisor is less likely to do so. An advisor can help identify financial alternatives, or maybe special leasing deals, that go along with a certain financing goal. Or he might advise to lease instead of purchasing an automobile for certain tax benefits. He may even suggest more humanitarian reasons for leasing a car! For financial decisions with long-term implications, the real value from a financial advisor can shine through.
The Age-old Debate—Lease vs. Finance
Both leasing and financing options have their fair share of advantages and disadvantages. Deciding which one is right for you depends on your personal situation. Your credit score, financial situation, and post-purchase plans are all important factors to consider before signing on the dotted line. First and foremost, however, any knowledgeable dealer or consultant will tell you these three things: 1. Leasing allows you to get more car with less money, but financing offers perks like ownership and less responsibility and costs. 2. Mileage will be the deciding lease factor 9 times out of 10. 3. Your expected post-purchase plans.
For those of us who love getting new gadgets when they come out and enjoy being able to play with and test out new technology every few years, buying a new car every 2-3 years is likely going to happen regardless. For the individual who loves their car and would be lost without it, you need to stick with purchasing. Suppose driving long distances, taking road trips, or embarking on spontaneous national park excursions are penciled into your yearly schedule. In that case, leasing will only aggravate the allergy that we normal people call high mileage overage fees. Always prioritize your lifestyle and personal needs before signing any financial documents regardless of interest rates, residual values, and maintenance fees. Measure twice, cut once!
