Can’t wait to get behind the wheel of a new car? There are few ways to do it these days. You might be trying to decide whether it’s better to lease a car or finance it, taking out a loan to buy the vehicle.
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There’s no cut-and-dried answer as to which is better. It’s impossible even to say which is cheaper, since there are so many variables to consider.
Whether you should lease or buy depends on your preferences, lifestyle and credit status. In this article, I’ll take you through some of the main points to consider when making the decision.
What does it mean to lease or finance a car?
First, let’s lay the groundwork to understand whether leasing or financing is the right choice for you.
Leasing a car means to sign a contract, usually for about three years, during which period you can drive the car as if it were your own. Every month, you make a set payment, like a long-term rental. Some restrictions will apply to how much you can drive it and what maintenance and insurance you are responsible for.
Financing a car is a way of buying the vehicle over a longer period, if you don’t have the cash to pay for the vehicle upfront. Like leasing, you will have to make monthly payments, but when you have paid off a certain amount you own the car.
Leasing used to be restricted to corporate or luxury clients, but now it’s a popular mainstream option, and it’s on the rise. In fact, more new vehicles were leased in the first half of 2016 than the first half of any year in history. Estimates are that nearly one-quarter of all car sales are now leases.
Not sure whether to buy or lease? Check these 8 points
At the end of a lease period, you drop off the car, hand over the keys and walk away. (Hopefully to your next car.) At the end of your financing contract, the car is yours.
In terms of financial investment, this is definitely a plus. However, if you’re the type of person who enjoys driving a new vehicle every few years, you might rather not get stuck with one. You can just go to an upgrade without the trouble of selling a car yourself.
Lease contracts usually specify maximum mileage. If you drive more than the limit during your lease period, you might be subject to lease-end fees.
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Financing doesn’t include mileage limitations, since you will keep the car at the end.
3. Costs and fees
Leasing generally involves lower interest rates, sales tax and down payments than buying. It’s also possible, if your credit is very good, to get approved for a zero-down lease deal, where you can drive away without a down payment. With financing the vehicle, you will always have to pay something upfront.
Monthly payments for a lease are also generally lower: 23% lower than monthly financing payments, according to some research.
4. Maintenance and warranty
If you lease a car, you are responsible for its maintenance. You have to keep it in top condition before returning it, or again, you might get hit with extra fees. A few bumps scratches here or there might not bother you on your own car, but if it’s a lease vehicle you’ll have to get it cleaned up.
The plus side is that the car will be under warranty, so you’ll be taken care of if there are any major problems.
A car you’re financing to buy is the other way around. You don’t have to be so careful about minor damage, and you can miss a service period or two if you have to. You’re also free to customize the car any way you want.
However, at a certain point the warranty will run out and you’ll have to handle any problems out of pocket.
5. Payment terms
Leasing will often cover a shorter payment period than financing.
If you choose to buy, beware of long-term loans! Some dealers will try to press buyers into extended loan periods. These can bring down the monthly payments down, but usually come with high interest rates and an increased risk of losses from depreciation.
6. Depreciation risk
Cars lose value over time. No one can guarantee how much or how fast, but leasing companies will make an expert prediction on their vehicles, known as residual value. This calculation actually determines the price of monthly payments on that car.
As a lessee, your payments cover the difference between your car’s value on the day you sign the lease and its predicted value at the end of the lease period.
In this way, the leasing company takes the risk of higher depreciation onto itself.
When you finance a vehicle, it’s a different story. If the car loses value faster than you pay it off, you might end up stuck owing more money than the car is worth. This is known as an “upside-down loan.”
7. Credit requirements
Getting approved for a lease can be more difficult than for a loan. If you have bad credit, getting a good deal is difficult but not impossible. You might end up paying higher interest rates and settling for a lower-grade car than you had hoped for.
Financing contracts usually have less stringent credit requirements, especially if the dealer handles the financing.
8. Contract period
Lease contracts usually last two or three years. If you want to get out of the lease before then, you’ll either have to find someone to take over your lease or pay hefty fees to break the contract. (The latter might cost you six months of extra payments.)
At the end of the contract, you will have to either start a new one or start taking the bus.
With financing, at the end of the loan period you are off scot-free and with your own vehicle, which makes buying usually cheaper in the long run.
However, if you want to quit the contract early, you’re still stuck either finding someone to take it over or selling the car yourself (with permission from your creditor).
So which is better: leasing or financing a car?
The short answer: it depends!
If you love driving a new car every few years, you’re a careful driver and you don’t cover too many miles, leasing might be a great choice.
If you want to keep your car for a long time and not worry about mileage restrictions, you might be better off financing.
Leasing can seem too confusing for the inexperienced, a process filled with obscure terms and hidden fees. However, it can also save you the trouble and cost of repairs for an older, off-warranty vehicle, and you can always be up-to-date with the latest auto technology.
Basically, it’s a personal decision. If it’s a question of cost, I recommend checking out a “buy or lease” calculator like Dinkytown or Bankrate.com. And if you want to know more about leasing, contact Capital Motor Cars. They can help you figure out if leasing is right for you and how to formulate the best deal.