The decision whether to finance or purchase a vehicle and leasing one may be the most difficult decision you face when getting a new car, truck, or SUV.
How you acquire the vehicle will in large part be determined by your financial situation. For many, the differences between new and used vehicles offers plenty of considerations.
Adding to that whether you should finance, or lease is yet another angle to consider. Everything begins with understanding the differences between leasing and financing.
For those who are considering getting their first vehicle, the more information you have, the better the decision you will make. First, you should understand the difference between leasing and financing a car.
Financing a car means you will own the vehicle once the payments have been completed. Leasing a car means at the end of the lease term, you can either return the vehicle or pay the remaining value to own it.
If you choose to lease a car instead of purchase, you can drive the car while you pay the monthly payment for a set period of time, but you will not own it at the end of the lease term.
What may be a little confusing is the very term financing. It really means paying for ownership of the vehicle.
Whether you take out a car loan or pay for it from your own pocket, financing is essentially the method you use to buy the car, truck, or SUV.
With leasing, you are never paying to own the vehicle. Instead, you are paying rent on it much like renting a place to live.
None of your payments are going towards ownership. Instead, the payments allow you to use the vehicle for a pre-set time.
Now that you know the main difference, the next step is whether you should either lease or finance a vehicle.
There are advantages and disadvantages depending in large part on your current financial situation.
If your income is such that money is not an issue in the purchase or leasing of a vehicle, then you can choose either method with little in the way downside.
But for most people, there are benefits as well as drawbacks that must be considered.
Pros & Cons of Leasing
Leasing means you get a new vehicle for two to five years on average. You pay a monthly premium much like you would if you took out an auto loan.
As stated above, the difference is that you are not paying to own the vehicle, merely to drive it during the timeframe that has been established. But you should consider the advantages.
Lower Monthly Payments: In most cases, lease payments are less expensive per month compared to financing. This is because you are paying for the depreciation of the vehicle over time. At the end of the lease agreement, you have paid what the owner has lost on the vehicle due to depreciation.
More Affordable Vehicle: Because vehicles that are leased have a monthly payment rate lower than purchasing a vehicle, you will be able to drive what would be a more expensive vehicle than you could afford to buy.
Warranty Protection: Although not always true, the warranty protection for leased vehicles tends to be stronger compared to vehicles available for purchase. This is especially true over the first three years in the life of a vehicle. So, you pay less each month and have more covered under warranty when going with a lease compared to financing a vehicle.
Get a New Vehicle: Once your lease period is up, you can sign up and receive a new vehicle under a new lease. This means that with considerably less hassle compared to purchasing a vehicle, you can lease one quickly and easily once you have completed the first leasing process. This assumes that everything went well with your first leasing effort.
However, there are considerable downsides to leasing that you should know about before making your decision.
Mileage Restrictions: Because you are paying on the depreciation of a lease vehicle, the more you drive it, the more it depreciates, the more you will pay. This means at the end of the lease you will have to pay for the additional miles over the agreed amount to cover the depreciation.
No Ownership: You never own the vehicle outright. Instead, you are only paying to use it for that timeframe. This can be problematic if you can pay for a vehicle in a shorter period compared to the lease agreement.
For example, if you can pay for a vehicle in two years, this offers a considerable advantage over a lease which is typically four to five years.
In two years, you own the vehicle outright and no longer make monthly payments. But if you lease the vehicle, you are still making monthly payments. This can be a drain on your finances by extending the payment period over a longer time.
Finally, because you will never own the vehicle, you cannot borrow against it. Vehicles are often used as collateral in securing smaller loans. Because you do not own a leased vehicle, you cannot use it as part of obtaining a loan.
Pros & Cons of Financing
Financing a vehicle generally takes from two to five years depending on the price tag of the vehicle and terms of the auto loan. Of course, this is shorter if you have a down payment available or can purchase the vehicle outright.
You Own the Vehicle: It cannot be stated enough that once you have paid for the vehicle, it is yours.
That means you own it outright with no monthly payments due for its purchase. This also means when you own the vehicle, you can use it as collateral as long as you do not have a loan attached.
Higher Monthly Payments: With leasing you are only paying for the depreciation of the vehicle. But with financing, you are adding in equity to the vehicle.
This means that you will generally pay more per month or over the lifetime of the lease when you are buying the vehicle. This is an added expense that you will have to account for when making the purchase.
While it sounds like there are few downsides to purchasing a vehicle. Nevertheless, you should know of why buying a car, truck, or SUV may not be right for your finances.
You are Stuck with the Vehicle: One of the biggest issues with purchasing a new vehicle is that after a few years it has depreciated considerably.
While pickups tend to maintain their value for longer, compact cars can drop considerably even in the first few years.
Now that you understand the positives and negatives of both leasing and financing a vehicle, the final step is determining which one is right for you.
Who is Leasing for?
The person who is most likely to lease a vehicle is one who enjoys driving new cars, trucks, or SUVs all the time.
The advantages of having a new vehicle that you can lease for a few years, then lease another is perfect for the individual who wants the reliability of a vehicle that is new.
Plus, because you will pay less per month compared to an auto loan, you can pick the type of vehicle that you want.
A good example is that if you feel like driving a jeep because you do some off-road traveling, then you can lease one for your adventures in the outdoors.
However, if you decide that the jeep is no longer suitable to your driving needs, then you can start up a new lease with another type of vehicle.
Just keep in mind that leasing also means you are not going to own the vehicle. It may be possible to purchase the vehicle after the lease agreement is up.
This assumes that the company has such a policy in place. Many leasing companies will have a purchase plan that is often the current price of the vehicle based on its value with a discount for those who have leased it.
Who is Financing for?
First and foremost, for those who can purchase a vehicle outright or have a large down payment that makes for a small auto loan, buying the vehicle is the best choice.
This is because you can own it outright and even sell it before it has depreciated too much.
Financing is also best for those who want to curb their payments over time. Once the vehicle is purchased, you can use the money that formally went towards the monthly payments for something else.
This provides you with greater flexibility with your finances as you can save up for another vehicle or purchase something else.
The bottom line is that leasing and financing offers advantages depending on financial circumstances and personal taste. The feeling of driving a new vehicle and changing it out when needed makes leasing tempting.
But the financial considerations of paying every month with no ownership of the vehicle in sight provides benefits for those who want to finance. The choice will be yours depending on what you want.
Benjamin is a certified financial advisor, with over 10 years of experience in the industry. He is knowledgeable about various business and financial topics, such as retirement planning and investment management. Ben has been recognized for his work in the financial planning industry. He has also been featured in various publications.