Financing vs. Leasing

To Buy or Lease?

 

 

 

Most new car buyers aren’t prepared to simply write a check for a new car’s purchase price.  Instead, most buyers drive out with a new car in one of two ways. Financing the purchase is the most common, with leasing being the other option. People are more familiar with purchasing. They buy things daily and finance something every time they use a credit card.  Leasing is more prevalent in the business world, where everything from office space, and office equipment, to fleet vehicles is likely to be leased.  Most people have likely never leased anything but an apartment. Is leasing a car a good alternative to purchasing? Let Valley Buick GMC & RV take you through the pros and cons of both options.

Should I Buy or Lease?Financing Basics

Financing a car starts with determining what cash you have that you can put in for a down payment and what you pay every month. Generally, car loans require between 10% to 20% of the purchase price for a down payment. If you have a trade-in vehicle, that can be part or sometimes all of the down payment. 

You choose your lender, which can be your personal bank, another bank if they have better terms, a credit union if you belong to one, or the dealer’s financial institution, which in our case is GM Financial. Financing through the dealer can be a good option, particularly when the manufacturer is providing incentives.  Often, the best incentives (cashback or low APR, among others) will be contingent on financing through the dealer. It is a good idea to research all your financing options before shopping.

Your monthly payment will depend on how much you are borrowing, the loan term (24 months, 36 months, etc…), and the interest rate. Each institution can have its own calculations for the interest rate, but they are all required to translate them to the Annual Purchase Rate (APR), a standard method of calculation that allows you to compare loan costs from multiple sources accurately.

For banks and credit unions, the APR will mostly be based on the national prime lending rate – which is determined by the Federal Reserve and fluctuates with the state of the economy.  Your own credit score comes into play as well. Lenders will charge a lower interest for lower-risk lenders and vice-versa. 

Dealer financing can be influenced by these issues, but again, manufacturer incentives can play a part. If a manufacturer determines they have too much inventory of a certain model, they may have their finance company lower the APR on the model.

With each payment, you pay down the cost of the car, known as the principal, and the interest. What you pay toward the principal reduces what you owe on the car. Once the loan is paid off, you are the legal owner of the car. You can keep the car, sell it, or give it away if you want. You can sell the car while you still have the loan, but any money from the sale goes to paying off the loan first. 

Buy or Lease?Car Leasing Basics

Aside from some nominal fees and taxes, leasing often requires little or no down payment, leaving you with just the monthly payments for the length of the lease, which is usually two to four years. However, any down payment you are ready to provide,  which can include a trade-in vehicle, will lower the lease’s monthly payment.

At the lease end, you turn the car back over to the dealership. Most people at this point lease another new car, but you do have the option to buy back the car you turned in. Unless you have been saving up, this will likely involve financing with a used car loan.

A leased car is technically not owned by you, so there are usually terms governing the car’s use. The biggest rules involve a maximum amount of accumulated mileage and the allowable level of wear & tear on the car by the lease end. You will pay fees for exceeding these. In some cases, mileage limits and other lease restrictions can be negotiated in advance. 

If you use your car for business, leasing can have some tax advantages. Because these tax deductions depend highly on specific business circumstances, you should discuss this with your employer or accountant to determine how the tax advantages apply to you.

Weighing the Options: Buy or Lease?Leasing Pros and Cons

Pros

  • No significantly lower down payment: You can sometimes lease a car with less money upfront. However, having money for a down payment will reduce your monthly payment.
  • Generally, you can get a more expensive car for the same monthly payment when leasing.
  • No-cost maintenance: Most leased vehicles have a paid maintenance deal with the dealer, so you won’t be paying for maintenance during the leasing period. If something unexpected goes wrong, the warranty usually covers most of the cost.
  • Continually able to drive a new or late-model vehicle: Leasing makes it easy to continually hop from a 2 – 3-year-old vehicle to a new one without directly incurring depreciation costs.

Cons

  • Mileage restrictions: Allowed mileage often ranges from 10,000 miles to 15,000 miles per year. Fees can often be between 10 and 25 cents per mile over the limit.  If you are not sure how much you will be driving during the lease term, this could be a concern.
  • Wear and tear fees: Often, dents, scratches, dings, scrapes, or interior stains can be difficult to control, and what is allowable for the course of the lease term may be difficult to specifically quantify. You may be charged for what the lease provider considers excessive wear and tear at the lease end.
  • Eternal car payment: Your car is never paid off. As long as you lease, the payments simply continue and often increase with the increasing cost of new cars. 
  • The lease dictates the timing of your next car. If you see a car you want coming out in six months, but your lease is up next month, you won’t be able to wait before securing your next car. 
  • Ending a lease early usually results in high fines: If things change and you can’t afford your payments or you don’t need the car, ending the lease early can be costly.

Financing or Leasing?

Financing Pros and Cons

Pros

The pros of financing all revolve around the fact that you own the car. You have the freedom to do what you want with it. You can drive it as far as you want, as hard as you want. You can sell it when you want and customize it as you want. If it gets damaged, how to fix it is up to you. As long as you keep up with the payments, your lender doesn’t care. And, once the loan ends, you can simply keep it, possibly saving the payment money for your next down payment along with the trade-in of your car. 

Cons

    • Higher upfront costs. You need to have money saved up for the down payment, and most likely, your financed payments are going to be higher than lease payments for the same car. 
    • Greater complexity: If you arrange your financing separately from the dealer, your car purchase can be a multi-step process, whereas leasing is usually a single-step process at the dealership. 
    • Maintenance costs: You are responsible for most if not all, maintenance costs, so you need to budget for these costs as part of your ownership of the vehicle. 
    • Frequently replacing cars can get expensive. New cars depreciate quickly, creating a significant gap between your current car and the next one.
    • Being upside down. This refers to a possible situation where you owe more than the car is worth. It is more likely to happen on long-term loans and/or loans with a very low down payment, either of which can result in the early depreciation being greater than what you have paid for the car thus far.

Currently, about 86% of new car shoppers choose to finance a loan, though leasing once rose as high as one-third of all new vehicle transactions. The F&I consultants at Valley Buick GMC are well-trained in both options, but the decision of what is best for you ultimately depends on your preferences. In general, if you enjoy always having the newest model and features, leasing may be your best bet. On the other hand, if you value freedom in what you want to do with your car, financing may be the better route.