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One of the first things you will encounter in buying a car is whether to lease or finance. Both methods have pros and cons, and which option is best depends on your financial condition, the amount you drive, and your long-term goals. In this guide, we break down leasing and financing, so you can better decide which method will save you money over time.
Understanding Leasing and Financing
Before getting into the financials, it is necessary to understand what leasing and financing a vehicle actually are.
What Is Leasing?
Leasing a car is the same as renting it for a fixed period, usually 2-4 years. You pay monthly to use the car, but you do not own it at the end of the lease term. Instead, you return the vehicle or have the option to buy it at a residual value.
What Is Financing?
Financing means you will take a car loan to acquire a car. You pay for it monthly, and when the loan is completely paid, the car is all yours, and you can hold on to it for as long as you wish.
Leasing vs. Financing: Comparing Costs
Among the many reasons you have to choose between leasing and financing is cost. Here’s how you break it down.
Upfront Costs
Leasing: Requires little to no down payment, though fees such as the first month’s payment and security deposit may apply.
Financing: Often requires a significant down payment, typically ranging from 10% to 20% of the car’s price.
Winner: Leasing has lower upfront costs, making it a more affordable option initially.
Monthly Payments
Leasing: Monthly payments are usually less expensive because you’re only paying for the car’s depreciation during the lease term rather than its full value.
Financing: Higher monthly payments since you’re paying off the entire vehicle cost plus interest.
Winner: Leasing is cheaper in terms of monthly payments.
Total Cost Over Time
Leasing: You never fully own the car, which means continuous payments if you keep leasing new vehicles.
Financing: Once you have paid off the loan, the car is all yours, with no more payments, which also saves you much money in the long run.
Winner: Funding is cheaper over time.
Depreciation and Ownership Consideration
Lease Depreciation Advantages
Since you never own the vehicle when leasing, you don’t have to factor in its loss in value as you would be returning it back at the lease’s end with no loss as far as you are concerned with its resale.
Financing Depreciation Costs
When you finance a car, its value is depreciating and you are stuck with the loss if you choose to sell or trade it in later. But after the loan is paid off, you have an asset that you can sell or keep without having to pay for it.
Winner: Leasing favors people who don’t want to worry about the car’s depreciation. Financing, on the other hand, favors those who are likely to hold the car for a long time.
Mileage and Usage Restrictions
Leasing Mileage Limits
Most leases have a mileage limit. These usually run in the 10,000-15,000 miles per year range. Exceeding that will attract a per-mile fee, which may quickly mount.
Financing Freedom
When you finance, you do not have any mileage restrictions, so it is a better choice for long-distance travelers.
Winner: Financing has more flexibility, mainly in case of high-mileage travel.
Maintenance and Repairs
Leasing Maintenance Coverage
Leased cars are under warranty for the time period of lease, hence most of the repair costs are covered. You need to bring the car back in good condition; otherwise you will be surcharged on top.
Financing Repair Costs
When you own a car, you are responsible for all repairs and maintenance, which can become costly after the warranty expires.
Winner: Leasing saves on maintenance in the short term, but financing can be cheaper in the long run if you maintain the car well.
Flexibility and Long-Term Considerations
Leasing Flexibility
Leasing lets you drive a new car every few years without having to sell or trade one in. However, ending a lease early is pricey.
Long-term Financing Gains
Financing offers you full ownership and the rights to alter or sell your car at will. Though you pay more initial premiums, the absence of monthly payments after paying off your loan gives you long-term financial freedom.
Winner: Financing is better for long-term savings, while leasing offers short-term flexibility.
Which Option Saves You More Money?
If short-term affordability is your priority, leasing may be the better choice. However, if you’re looking for long-term financial benefits, financing a car will save you more money in the long run.
Summary of Cost Savings
Factor Leasing Financing
Upfront Costs Lower Higher
Monthly Payments Lower Higher
Long-Term Cost Higher Lower
Mileage Restrictions Yes No
Depreciation Concerns No Yes
Ownership After Payments No Yes
Therefore, if you plan on holding the car for more than five years, financing is the superior financial choice; however, if you want a new car every so often and a lower monthly payment, consider leasing.
Conclusion
Whenever between leasing and financing a car to decide, check your budgeting, driving history, and longer-term goals because leasing has much lower upfront expenses and monthly payouts but can result in high future costs due to continuous payments without the option for mileage. Finance requires a significantly higher investment right at the get-go but means saving money more in the future since you finally own the vehicle.
Ultimately, the choice depends on what you need. If you want financial freedom and long-term savings, financing is the smarter option. However, if you value convenience and driving a new car every few years, leasing might be worth considering.
FAQs
- Is leasing a car ever a better option than financing?
Yes, leasing can be a viable choice if one enjoys driving new cars every so often and seeks reduced monthly installments. The strategy is less beneficial for saving for the long run. - What occurs at the termination of a lease?
At lease end, the vehicle is surrendered to the car dealer. Depending on the specific agreement, it might also present a buyout, where the vehicle can be purchased at the predetermined price by the lessee. - How does leasing affect my credit score?
Leasing will also affect your credit score, the same as financing. Consistent, on-time payments improve the score; a missed payment, however, could hurt the score. - Can I cancel a lease early?
Yes. However, if you decide you want to terminate a lease, it will probably cost you since there’s often an early termination fee. Do not sign without reading through and understanding the lease terms. - Is leasing a luxury car cheaper than financing one?
Leasing can make luxury cars more affordable since monthly payments are lower. However, you’ll never own the vehicle, and lease terms may include higher fees.
