Leasing versus financing: is one way better than the other?
This handy guide will help you decide which option is best for you.
Buying a new vehicle can be overwhelming. These days, signing the paperwork for a new car feels like buying a house versus a set of wheels. Before you get to that, however, it’s important to know which payment method is best for you. Aside from cash, there are two primary options: financing and leasing.
When I sold cars, leasing was a lot like “declawing the monster.” Despite some horror stories, leasing is a great way to go for most people. Still, it might not be the best option for you personally. In that case, financing comes into play, and that has benefits too.
Which one is right for you? Our list will help you decide.
If you like the latest and greatest, leasing is definitely for you. Every two or three years, you are looking at a shiny, new vehicle. Leasing is a sure fire way to prevent boredom with what’s in your driveway.
If safety is one of your biggest concerns, leasing ensures you are always getting the most updated and advanced safety technologies. Same goes for fuel economy. You will always have the car with the latest, most efficient engine advancements.
Financing Advantage: Emotional Attachment
If you sense you will really like a particular vehicle, financing is the way to go. You are under no obligation to trade and you can drive it until the wheels fall off. I know many folks like this, and it’s common among my friends and neighbors here in the Detroit area. They use a vehicle to its full potential and don’t see the need to buy another one until it literally falls apart.
In general, it’s not advised to buy out your lease at the end. The payment will often be higher than what you were originally paying.
Leasing Advantage: No (Or Very Little) Down Payment
When financing, always have a down payment of at least 10 to 20 percent of the vehicle’s purchase price. Leasing works differently, requiring either very little or no down payment. Just watch the advertisements closely – sometimes they flash a low lease payment but with a significant portion down.
On my personal vehicles, I put just enough down to cover the tax, title, and license (included in a lease). That takes the edge off so to say, and you won’t be paying interest on that portion over the course of the lease. Generally speaking, with a lease and down payments, less is usually more. Bankrate explains some of the common blunders people make when leasing – putting too much down being one of them.
Financing Advantage: No Mileage Penalties
If you anticipate putting on lots of miles in the course of a few years, financing is probably better. Leases that offer the lowest monthly payment will likely limit you to 10,000 to 12,000 miles a year. Edmunds nicely explains high mileage leases and how the residual values (how much the car is worth at the end of a lease) would compare to more traditional leases.
Overage mileage penalties can be a burden. Also, if you have an active family, you don’t want to get halfway through the year all to realize you can’t drive your vehicle. Leasing can be a bit of a balancing act when it comes to determining your vehicle usage. If you think you are going to exceed 800 to 1,000 miles a month, leasing may cut it too close for you.
This is where I have a hard time with leases. You always seem to drive more than you think, especially when your schedule changes or if unexpected things pop up. And you don’t get credit for unused miles either. If you turn a lease in say 4,000 miles under, you will not be reimbursed for those miles, even though you paid for them up front.
When financing a vehicle you don’t have any of these concerns.
Leasing Advantage: Always In Warranty
When you finance a vehicle, past a certain mileage, maintenance will be on you. With leasing, you stay under the protection of full factory warranty. It doesn’t take long for repair bills on a higher mileage car to add up. Those repair bills are even more painful if you are still making monthly payments on the vehicle.
With leasing, unforeseen mechanical problems are of no financial burden to you. With the exception of oil changes, tire rotations, and maybe some wipers blades, your major service bills should be zero.
Financing Advantage: Less Overall Restrictions
Let’s say you want to modify a truck for aggressive off-road driving, or boost the engine performance of a sports car, then financing is better. Leasing works only if you plan on returning the vehicle exactly how you got it.
Financing is more flexible with regard to vehicle condition too. For example, you probably don’t want to lease a truck you plan to take on the farm or construction site. If there is excessive damage or wear and tear at lease end, barring a protection plan you purchased at the beginning, those costs are on you.
Lastly, financing deals are more forgiving should you need to get out of them. You can trade to another vehicle more easily, and provided your credit is good, roll the difference over. You can even pay them off outright, many times without penalty, before the full term. Leasing doesn’t work that way and termination fees may apply. Think of it like trying to leave an apartment lease early – it’s similar with an automobile.
There is no right or wrong way to obtain your new vehicle – just the way that is right for you. This list is a general overview but it will get you started. Still, if you have questions about leasing versus financing, please contact us.
Carl Anthony is Managing Editor of Automoblog and resides in Detroit, Michigan. He studies mechanical engineering at Wayne State University, serves on the Board of Directors for the Ally Jolie Baldwin Foundation, and is a loyal Detroit Lions fan.