Should you finance or lease a car? Most buyers prefer financing – which is essentially like taking a loan out for your new car – but you can also choose leasing, which is an agreement to drive a vehicle for a few years and then return it.
You could say that it’s a choice between owning and renting a car, but that would be an oversimplification of a more complex reality.
Let’s take a look at the advantages and disadvantages of each payment method and see which one is better for you…
Advantages of Financing
Financing is straightforward. You sign a deal and then you slowly pay off the car’s price (plus interest) until you fully own it. You have no mileage restrictions like you do with leasing, and once all the payments are made, you can either sell the vehicle or trade it in for a new one. Alternatively, you can keep it until its wheels fall off – the choice is yours.
It’s also worth noting that once you are done paying off your car loan, a significant portion of your monthly costs are gone, leaving only insurance, maintenance and repairs. That said, the need for repairs usually increases as your car gets older.
Another advantage of financing is the ability to build equity in the car, which is important if you want to trade in your car before paying off your loan fully. In fact, many dealers are willing to pay off your existing balance to make the trade-in happen.
Admittedly, equity can be a sticky issue since there are two types – negative and positive. Positive equity means that you owe less than what your car is worth and negative means just the opposite. Some dealers may choose not to pay negative equity and instead attach it to your next loan, which would increase your monthly payments on the new car.
Advantages of Leasing
The biggest advantage to leasing is that your monthly fees are likely to be lower. That’s because your monthly car loan payment is based on the vehicle’s full price, while a lease payment is derived from a percentage of the price.
For instance, if the car you are financing costs $25,000, then you have to pay the amount fully. However, if you choose to lease the same vehicle, then you will pay only what the car is expected to be worth by the time the lease is done. So, if the vehicle’s residual value is expected to be 60 per cent in three years, then are only required to pay off the remaining 40 per cent, which in this case would be $10,000.
It’s also possible to avoid making a down payment or security deposit in some cases – however, this would result in higher monthly payments.
Most leases run for as long as new-car bumper-to-bumper warranties, which is generally about three years. As a result, you won’t have to pay for any repairs until the lease is done. However, you are still on the hook for performing standard maintenance, like oil changes, tire rotations and so on. Failing to do so can result in a fine.
And, what happens after your lease is done? Well, you get to lease a new vehicle without worrying about selling or trading in the old one. In other words, you always get to drive a new car, with all the latest tech gadgets and safety features.
Disadvantages of Financing
Choosing to finance a car does not mean that you own it immediately. You still need to pay off your loan until you can make such a claim. By that time, you may already want to sell the vehicle or trade it in at a dealership, making your so-called ownership a short-lived experience.
Additionally, your monthly fees are generally higher, and a down payment in the form of cash or a trade-in is usually a requirement.
New vehicles also tend to depreciate very quickly in the first three years, which means that by the time you’re done paying off your loan, the vehicle may be worth very little. You can try to combat this by trading in the car sooner, but if the vehicle has negative equity, then the amount will be added to your next car loan making your subsequent car payments even higher.
Disadvantages of Leasing
Perhaps the biggest issue with leasing is the limit on the number of kilometres you can drive per year. You need to make sure you don’t go over that limit – doing so can cost you a lot of money once you turn the car in.
Another major deterrent for many people is the lack of ownership since you’re essentially renting the car. However, if your plan is to drive a vehicle for a few years and ditch it afterwards in favour of a newer model, then you should be fine.
However, without ownership, you can’t build equity or keep the vehicle once the lease expires, meaning that you either have to get a new car with new payments or finance the one you were leasing.
How to Make Your Choice
Your choice will ultimately come down to personal preference and financial situation. Take into account the car’s longevity, its potential value in the future, how long you plan to keep it and your monthly budget.
There are plenty of online tools such as the Unhaggle dealer cost report that will calculate how much each payment method would ultimately cost you depending on your preferred method.