When it’s time to look at getting a new car, even if it’s just new to you, not many people can pay the full price up front in cash. Most of us decide to finance the purchase, or choose to lease a vehicle instead. Both approaches have their advantages and disadvantages. Let’s explore your options when it comes to a lease vs financing a car.
Financing is borrowing money to pay for a car, and then making monthly, bi-weekly or weekly payments until you’ve paid off the principal and the interest. Most car loan terms are between 36 to 60 months, or three to five years, although terms as long as 84 months (seven years) are sometimes available. The shorter the loan term, the less interest you will have to pay, but your monthly payments will be higher.
If you are buying your new or used car through a dealership, they can arrange financing for you, but it’s worth getting quotes from your bank and other lenders to make sure you’re getting the best deal possible. If you’re buying a new car, dealers sometimes have zero-interest loans available when they need to clear out old inventory before the next year’s models arrive on the lot. However, you usually have to have an excellent credit rating to qualify for these deals.
Advantages of Financing
There are a few clear advantages to financing the purchase of a vehicle. Most importantly, when you’ve paid off the loan, you own your car, free and clear. It’s the same as paying a mortgage rather than rent. You have built equity in your car and can look forward to a few years without car payments until you need to get a new one. And at that time, you will be able to either sell your car and make some money towards a down payment on a new loan, or trade it into the dealer to lower the price of that new car. As well, you don’t have to worry about limiting your mileage as you do with a lease, and can modify your vehicle in any way you want.
Disadvantages of Financing
Financing a car isn’t without issues, however. First of all, especially if you’re buying a new car, depreciation will lower the value of your vehicle as soon as you’ve driven it off the lot. You may owe more on your loan than your car is currently worth. As well, especially if you have a shorter-term loan, you will have substantially higher monthly payments that you will need to budget for. And while you can sell a car before your loan is paid off, having a lien on it does make things more complicated.
While you will still be making monthly payments when leasing a car, you will have signed an agreement that you will be returning that vehicle in good condition at the end of the lease. Most leases are for two to three years, and you then have the choice of returning the car to the dealership and paying any end-of-lease fees, continuing the lease agreement on that car or a new model, or purchasing the car for an amount specified in the original contract.
Advantages of Leasing
Leasing is great if consistently driving a newer model vehicle is important to you. You can drive a new car off the lot every few years without worrying about depreciation or selling your current car to move up to a new one. There’s also fewer maintenance issues to worry about with a new car, and many dealers will offer a warranty to cover most repairs over the length of the lease. You will have lower monthly payments than if you’re buying a vehicle using financing, and if you’re a business owner or independent contractor, lease payments are tax-deductible.
Disadvantages of Leasing
Leasing has its downsides, however. In the first place, it’s like renting an apartment rather than buying a condo. When the lease is over, you will not have earned any equity for all the payments you’ve made. In fact, you will probably have to pay some fees when returning the car to the dealership at the end of the lease. Most lease agreements limit you to 20,000 to 24,000 km a year, and if you exceed that, you will have to pay from 7 to 15 cents per kilometer over that limit. As well, anything beyond reasonable wear and tear to the vehicle can result in additional fees. And if you like to customize your ride, you can forget about that with a leased car. Tinted windows, high-end audio systems, and custom wheels would all have to be removed at the end of the lease, or you will again end up paying more when you drop the car off.
Finally, being tied down to a lease can conflict with unanticipated life events. If you lose your job, you may not be able to make your payments, or if you end up moving to a different country, you probably won’t be able to take your leased vehicle with you. And if you’ve leased a sports car and then get married and have a baby, you will need a more family-friendly ride. However, ending a lease early can mean substantial financial penalties.
Lease vs Finance a Car: Which Option is Best?
In the end, you have to weigh the pros and cons of leasing and financing and decide which is best for you. If you have a long daily commute or like to go on frequent car trips, for instance, you’re pretty well guaranteed to blow past the kilometer limits on a lease agreement, which will make those smaller monthly payments less attractive when you have to pay up at the end of the lease. On the other hand, if you want to always be driving a new model car with the latest features, leasing is the obvious choice.
However, if you want to have some equity at the end of all those monthly payments, financing the purchase of a new or used car makes the most sense for you.