When it comes to purchasing a new car, one of the most common dilemmas people face is whether to Lease vs Finance a Car. Here we help you navigate this decision and become a savvy car buyer. With over a decade of experience assisting consumers in their car purchases, we understand the ins and outs of the car ownership process. In this article, we’ll explore the key factors you should consider when deciding between leasing and financing to ensure you make the right choice.
Are You a Long-Term or Short-Term Car Owner?
The first step in determining whether a Lease vs Finance Car is the better option for you is to assess your long-term goals. Are you the type of person who plans to keep a car for seven to eight years or even longer, driving it until the wheels fall off? Or are you someone who enjoys switching to a new car every few years, whether for variety, avoiding long-term repair costs, or simply relishing the feeling of driving a new car regularly?
It’s crucial to be honest with yourself and understand your buyer profile. Many people buy a car with the intention of keeping it for the long haul, only to change their minds after a few years. When this happens, they often trade in their vehicle, only to discover they owe more on the loan than the car’s value – a situation known as negative equity. To avoid this financial pitfall, it’s vital to know your ownership preferences.
Lease vs Finance Car: Key Differences
The primary distinction between a Lease vs Finance Car lies in your payment structure and ultimate ownership of the vehicle:
- You make payments on the total purchase price of the car.
- Once you complete your payments, you own the car outright.
- You make payments on a portion of the car’s total price, resulting in lower monthly payments.
- At the end of the lease, you have the option to pay a predetermined buyout amount to own the car, or you can return it to the dealership and start a new lease.
Now, let’s delve into a practical example to illustrate the cost differences between financing and leasing using a 2021 Toyota Corolla as our reference. At the time of this writing, Toyota was offering the same low-interest rate of 0.99% for both financing and leasing.
- Total car price (including fees and taxes): $29,279
- Monthly payment over 48 months: $622.40
- Total cost of borrowing over four years: Approximately $129 (interest cost)
- Same car’s price: $25,911 plus tax
- Monthly lease payment over 48 months: $344
- Total cost of the lease over four years: $16,512
- Buyout amount at the end of the lease: $12,045
However, it’s important to note that you can’t finance the lease buyout at the same low-interest rate. Typically, you’d need to secure a separate car loan, which often comes with a higher interest rate. For instance, if you’re offered a 4.99% interest rate on the buyout, the total cost could exceed financing the car from the start.
Benefits of Financing and Long-Term Ownership
If you’re committed to keeping a car for an extended period, financing is generally the more cost-effective choice. It not only results in lower total borrowing costs but also leads to more economic ownership in the long run. Owning a car for an extended period allows you to enjoy a lower cost per mile, making it a financially savvy choice.
Additionally, leasing comes with certain conditions, such as mileage limits and penalties for exceeding them. You must also maintain the car in good condition to avoid wear and tear charges upon returning it. Moreover, breaking a lease early can be costly. So, if you plan to stick with a car for the long haul, financing is usually the best route.
When Leasing Makes Sense
Leasing isn’t without its merits, particularly for short-term owners and specific situations:
- Some people prefer the flexibility of driving a new car every few years, and leasing allows them to do so.
- Business owners can deduct lease payments as a business expense, potentially reducing their tax burden.
- Certain cars offer great lease deals with low-interest rates and high resale values, leading to affordable lease payments.
- High-end luxury or European cars with expensive repair bills and fast depreciation can be ideal for leasing, as it shield you from costly repairs.
Ultimately, the choice between financing and leasing hinges on whether you’re a long-term or short-term owner. If you prefer holding onto a car for as long as possible, financing is the cost-effective option. However, if you enjoy driving new cars every few years and want to avoid repair expenses, leasing may be the better fit.
In the perennial debate of leasing vs financing car, the choice largely comes down to your individual preferences and long-term goals as a car owner. Understanding your own profile and financial outlook is key to making the right decision.
For those who intend to keep a car for several years and seek the lowest cost of ownership, financing is usually the most prudent path. With financing, you maintain the same low-interest rate throughout the loan term, resulting in a more economical overall expense. Holding onto a car for an extended period can also lead to a lower cost per mile driven.
Frequently Asked Questions (FAQs)
Which option, leasing or financing, is more cost-effective in the long run?
The answer depends on your specific circumstances. If you plan to keep a car for many years and drive it extensively, financing often results in lower long-term costs. However, if you prefer driving a new car every few years and are not concerned about long-term ownership costs, leasing may be a better choice.
Can I negotiate the terms of a car lease, similar to how I can negotiate the purchase price when financing?
Yes, you can negotiate various lease terms, including the purchase price, money factor (equivalent to interest rate), mileage limits, and other fees. Negotiating can help you secure a more favorable lease deal.
What happens if I exceed the mileage limit on a leased car?
If you exceed the agreed-upon mileage limit in a lease, you will typically incur mileage overage charges. These charges can add up quickly, so it’s essential to estimate your annual mileage accurately when setting up a lease.
Can I buy the car at the end of a lease if I decide I want to keep it?
Yes, most lease agreements offer the option to buy the car at the end of the lease term by paying the predetermined buyout amount. This can be a good choice if you’ve grown attached to the vehicle or believe it offers a good long-term value.
Are there tax implications for leasing or financing a car?
Tax implications can vary depending on your location and individual circumstances. In some regions, leasing may offer tax advantages, especially for business owners who can deduct lease payments as business expenses. Financing, on the other hand, typically involves paying sales tax on the entire purchase price of the vehicle. It’s advisable to consult with a tax professional to understand the specific tax implications in your area.