Lease or Finance a Car – What to Do
August 17, 2018Updated: February 4, 2022
Is it better to lease or finance a new car? The truth is there is no perfect answer. There are benefits and disadvantages to both so your answer depends on your own needs. The real question is – which one will fit your needs and budget best? Here is a breakdown of leasing a car versus financing a car and the pros and cons of both.
Leasing
In the simplest of definitions, leasing a car is very similar to renting. You pay a down payment and a certain amount of money each month to drive your car until the end of the lease term – usually 3 to 4 years. When buying or financing a car, you have to pay the entire purchase price. When you lease a car you simply pay for the depreciation of the car over the term of the lease (its initial value minus its residual value).
Pros of Leasing a Car Include:
- Lower monthly payment
- A smaller down payment
- Possible tax savings
- Likely under warranty
- Newest auto technology every few years
Cons of Leasing a Car Include:
- You do not own the car
- Many stipulations
- Number of miles permitted
- Possible wear and tear fees
- GAP Insurance
- Good credit
Most leased cars have a restriction on how many miles you can drive them per year built into the contract you sign. If you go over this number, you may have to pay a hefty mileage fine. There is also the potential to pay excess wear fees if the car is not returned in its original condition.
Another downside is most leasing companies require you to have very good to excellent credit to lease a car, as well as GAP insurance which generally ensures you are wholly responsible if the car is totaled or stolen.
Cost Example
Car Cost: $30,000
Down Payment: $5,000
Trade-In Value: $10,000
Lease Term Length: 48 months or 4 years
Sales Tax: 9%
Interest Rate: 6%
Monthly Payment: $189
Sum of Money Spent (by end of lease): $34,417*
Financing
Financing a car is simply taking out a loan to buy a car. If you pay in cash, you own the car as soon as the paperwork is signed. If you take out an auto loan or finance, the bank holds ownership of the car until you pay it off. Once the final payment is made on the loan, you are the sole owner of the vehicle.
Pros of Financing a Car
When you finance a car, you actually own the vehicle so there aren’t any restrictions on what you do with it or how many miles you drive in it. You can customize the vehicle however you please and don’t need to worry about excess wear fees.
Another pro is once you have made the last payment on the car, there aren’t any more monthly payments – you just have to pay for gas, maintenance fees, and insurance. Unlike a lease, if you get tired of your car and decide to buy a new one, you can sell it and use the money you make towards the down payment on a new one. While interest rates will depend on your credit score, you do not have to have perfect credit to get a loan on a car.
Cons of Financing a Car
- Banks require a down payment on the purchase of a car- usually between 10% and 20% of the value of the car.
- Cars depreciate rapidly
In the short run, buying a car is also more expensive than leasing. The overall cost of the car is more expensive as well as the interest you pay each month on the car loan.
Cost Example
Car Cost: $30,000
Down Payment: $5,000
Trade-In Value: $10,000
Loan Term Length: 48 months or 4 years
Sales Tax: 9%
Interest Rate: 6%
Monthly Payment: $416
Sum of Money Spent (by end of loan): $34,953*
How to Choose
When deciding whether to lease or finance a car, here are some things to consider:
- Do you frequently drive long distances?
- Do you enjoy driving a different car every few years?
- Do you always want to make a payment?
There is no right or wrong answer to the leasing vs. buying question. The answer to the question lies in your personal wants and needs. If you do not drive frequently and always want the newest and the best, then it may be best to lease a car. If you want to be able to customize and own your own car, consider purchasing a used car.
Explore different buying and leasing options until you decide what is best for your own budget and lifestyle.
*This is an estimate and doesn’t include any additional fee such as wear and tear or over mileage. Estimates and totals are according to the cars.com/car-loan-calculator.