Leasing or Financing? Which is better for you?
To lease or to own? It is the divisive question facing every driver in the market for a new car. There are pros and cons to both leasing and financing your vehicle, and we can help you figure out which way might be best for you.
Lease-lovers adore getting a brand new, shiny car with the latest technology every few years. Leasing gives the ability to stay within factory warranty and generally switch up vehicles with little or no negative equity. On the other hand, owner-advocates may prefer to keep their vehicles longer, customize it their way and have a higher tolerance for future repairs when loan payments are done.
But, which is better for you? Like so many things in life, it depends. To answer this question, your answer generally depends on your lifestyle, cash flow and preference.
Leasing a car essentially means you pay only for the portion of the car you use. This means you pay the dealership to drive the vehicle for a predetermined amount of time, usually two to four years. The payments are a mix of principal, interest and taxes. Payments may be cheaper because you are only paying for a portion of the cost of the vehicle, the difference between the sale price and the guaranteed future value. We will cover more of this later in the article. At the end of the lease, you have options, you can trade the vehicle and take advantage of any equity, give the vehicle back to the leasing company and walk away, or purchase the vehicle for the guaranteed value set out at the beginning of your lease.
When you buy a car, you take out a loan for the entire sticker price of the vehicle plus taxes minus your down payment. Your monthly loan payments could be more than if you were leasing the same car. The difference is, at the end of the day, is that you have an asset, once your debt is paid off. That asset is then yours to keep, sell or pass on.
Pros and Cons of Leasing
Leasing a car is generally cheaper than purchasing the same car with a loan. This means, you could get a higher end vehicle as opposed to a lower or mid-range option to purchase.
Con: Always have to pay
Unlike the financing and owning option, you won’t have a day when your payments are gone. Instead you will always be paying for a lease on the newest and shiniest car on the lot.
Pro: Upgrade Every Few Years
If having the latest and greatest when it comes out is important to you, then leasing is a great option. Instead of being with the same car for upwards of 10 years or more in some cases, you will have the newest tech, safety features and designs at your fingertips regularly. Most leases also match the terms of the manufacturers warranty which means that you are driving a vehicle through what is referred to as the gas and go stage. Repairs will be covered under warranty and having to replace wear items like tires and brakes will usually not be an issue through the term of the lease.
If you like to customize your vehicle, say with decals, window tint or lift kits, you will have to return the vehicle to the vehicle to factory condition in order to turn it back to the lease company if that is your intention.
At the end of your lease, you have options as to what you would like to do. At lease inception the leasing company has given you a guaranteed future value. The leasing company says that at the end of the lease term, based on the kilometers you have decided on, the vehicle will be worth $xxxx. If the market changes and the vehicle is not worth this price, you do not have to take on this negative equity, you can choose to hand the lease back and walk away. If the vehicle is worth more than that amount, you can choose to buy it or trade it and take advantage of the equity.
Con: Return in Nearly the Same Condition
At the end of your lease, you need to return the leased vehicle in roughly the same condition as when you first picked it up. Most lease options allow for “normal wear and tear” during the term of your lease but may require certain items to be repaired or replaced if there is “excess wear and tear”. For the most part, this means replacements of cracked windshields, and make sure you have both sets of keys. Some manufacturers also have certain insurances that you can purchase up front that will cover the cost of these repairs for you, for example, Ford offers “wearcare” that covers certain things like windshields and small dents and scratches over and above normal wear and tear. It is important to ask your dealership to clarify what constitutes excess wear and tear.
When you lease a vehicle, rather than finance, your vehicle will always be under warranty. This is a big plus for you, as those costly repairs won’t weigh you down.
Pros and Cons of Buying
Pro: In for the Long Haul
With buying a vehicle, you can easily drive it for years after the loan is paid in full. Many just want to have a car and keep it for as long as possible, or until it starts needing costly repairs.
It is important to note: Many drivers now are changing up their vehicles every 3-4 years. When trading your vehicle in before your term is up, you can end up making car payments forever while never getting ahead in equity.
Con: Fully Responsible
Like anything you own, you are responsible for it. Cars, unfortunately, are not built to last forever and the maintenance costs can get expensive once your warranty expires. You may find the maintenance costs for some of the larger mechanical repairs can become costly down the road. The costs become higher when larger components needs repair or replacement.
Con: Higher Payments
With the financing option, you end up having a higher costs than leasing. You are also paying a lot in interest on the loan, mostly in the first half of the loan. Finance terms can stretch to 96 months on most new vehicles if you want the cheapest payment possible. You are able to make extra payments or payout early without penalty however. Remember as well that your manufactures warranty on average is 3 years or 60,000 kms, so you may want to invest in an extended warranty plan to cover unexpected repairs in the future. The best way to become payment free is to have a large down payment which could take time to save for as well.
Pro: It’s Yours
Because the vehicle is yours, you don't have to fix anything that you don't want or can put off a costly repair until you can afford it. You can drive also as many kilometers as you need or want, and don’t have to worry about keeping it pristine if you don’t want, because it’s yours.
The value of your vehicle at time of trade depends on many things such as the kilometers driven, accident history, and condition. At whatever point in your loan you decide to try to trade, you will still have an obligation to pay the bank back the remainder of the loan. If your vehicle is worth $10,000 and you owe $15,000, the $5000 difference will be added to the new loan meaning your loan on your new vehicle is now $5000 more.
The new reality is, a majority of people change their vehicles every 3-4 years. If that is the case for you, then a lease may be a much better option, given what has been explained above.
Like with everything in life there are pros and cons to consider with every decision. It is our goal to give you all the options at your disposal to help you in your car shopping experience. At Direct2Wheels we want to help you on the way to credit recovery while finding the perfect car to fit your needs and budget.