Is a new car in your future? While there are many decisions you are likely to have to make, one may also be whether or not you will finance or lease a vehicle. Each year, many drivers opt for one course of action over the other and yet the reality is, there are various pros and cons associated with each of these decisions.
Read on to help answer the question,“is it better to finance or lease a new car?”
To get things started it is best to first clarify the difference between financing and leasing.
Financing: If you don’t already know, when you finance a car, you are taking on a car loan and will make payments on the vehicle until you have completely paid off the loan, As a result, you will now officially own the vehicle.
Leasing: On the other hand, when you lease a vehicle, you are essentially paying for the use of the vehicle, however you are not likely to end up owning the vehicle. The likelier outcome is that you will trade the car back in and either lease or purchase a different car altogether.
Now that this is out of the way, which is the best course of action for you?? Here are some pros and cons attached to each potential vehicle arrangement.
Financing (to own):
When it comes to financing a vehicle that you plan to own one day in the near future, there are some pros and cons associated with this decision.
Pros: When financing a car, you are putting money towards an entity that will become an asset for you in the future. Ultimately, since you will own this vehicle, it can be something that can benefit you financially in the future in the form of equity. If for example, you opted to sell the vehicle down the line, you can make some money to pay towards something else.
Financing to own versus leasing can also be beneficial because you won’t have to make monthly payments forever. Once you have paid off the car in total, those payments will stop and the car will belong to you, no strings attached.
Cons: When it comes to the downsides of financing, there are however some aspects you will want to consider as well. For example, since vehicles depreciate rather quickly (even as soon as you drive them off the lot), then you will be losing value in your vehicle over time. Even long after you have become the sole owner, when you do go to sell it or trade it in, you definitely won’t get as much money for it.
While this is to be expected of course, it is still important to remember that vehicles can depreciate as much as 30% in the first year of driving. In this respect, financing can work out to be more expensive than leasing over time, especially if numerous repairs costs are required long after the warranty has expired.
Just with financing, there are also positive and negative sides to leasing.
Pros: For starter, as previously mentioned, in some cases leasing can work out to be less expensive than financing. Monthly payments, for example are typically lower on leased cars versus financed ones, as the payments are likely to be calculated based on the vehicle’s original price minus the remaining residual price.
Leased vehicles are often also less costly over time, as warranties are normally aligned with the leasing term. As a result, if you do require certain repairs, these are more likely to be covered versus financing to own a vehicle over a longer period of time.
A final advantage of opting to lease over financing has to do with the fact that you don’t have to try and sell a vehicle you are leasing. At the end of the lease, you are able to move on from that vehicle without having to take the necessary steps to sell or trade it in.
Cons: Regarding this topic, you will however want to factor in the downsides associated with leasing as well.
The first point being that the money you are paying towards the vehicle each month will not amount to any equity for you down the line. Since you won’t be a car owner after all is said and done, the vehicle will not exist as an asset for you over time.
Another drawback of leasing a vehicle also stems from the fact that there are certain restrictions associated with leasing that do not apply to financing. For example, a typical leasing arrangement will likely include a mileage limit. A mileage limit will be set and if you go over this limit before the end of your leasing term, this is likely to result in additional fees attached to your final payment.
Leasing a vehicle can also prove to be expensive in the end, if you decide to end your lease before the term is up. These charges are known to be rather significant as well and therefore this reality should be an important consideration to make before you enter into a leasing agreement.
Finally, when trying to decide if financing or leasing is a better fit for you, you should also factor in, how your will use this car – more specifically how it will compliment your lifestyle.
Lifestyle reasons for Financing:
For example, financing may be a better fit for you if you will be putting a lot of kilometres on your vehicle. If your lifestyle requires a lot of driving, then leasing can be a downside as you are required to keep the mileage under a certain level.
Lifestyle reasons for Leasing:
Alternatively, if you know you won’t rack up the mileage and plan to keep the vehicle until the end of the term, then leasing can instead be a beneficial move.
Ultimately, there are a variety of important factors that go into deciding which vehicle arrangement is best for you. You can start by taking a look at your lifestyle – and your finances and go from there.
If you have bad credit, you will especially want to think about whether leasing or financing offers you a better outcome. Will one scenario save you more money and allow you to improve your credit at the same time? It is extremely important to keep this in mind, as you move forward with either a commitment to financing or leasing a new vehicle.