Car Purchasing 101: Pros and Cons of Leasing vs Financing
If you are looking for a new vehicle, the end of the year can be a good time to shop around. Dealerships are making room for their new inventory by selling their current year’s model at a discount or at a better deal.
However, when it comes to getting your new vehicle, the choice between financing and leasing can be tricky. Both options will have their pros and cons, and understanding the basics can help you decide what best suits your preferences and financial situation.
In this post, learn the pros and cons of leasing vs. financing a car, along with factors to consider to make the best decision for your budget and driving needs.
What Does Financing a Car Mean?
Financing means buying a car with the help of a loan. You borrow money to pay for the vehicle upfront and repay the loan over time (with interest). Once you’ve paid off the loan, the car is yours.
Pros of Financing a Car
Ownership: You own the car after the loan is paid off, and you can keep it as long as you want.
No Mileage Limits: Drive as much as you like—there are no restrictions.
Customization: You can modify or personalize the car to suit your style.
Long-Term Savings: Over time, owning a car can cost less than leasing if you plan to keep it for many years.
Cons of Financing a Car
Higher Monthly Payments: Loan payments are typically higher than lease payments.
Depreciation: Your car loses value over time, and its resale value might not be what you expect.
Maintenance Costs: As the car ages, you’re responsible for repairs and upkeep.
What Does Leasing a Car Mean?
Leasing is like renting a car for a few years. You make monthly payments to use the vehicle, but you don’t own it. At the end of the lease, you return the car or have the option to purchase it.
Pros of Leasing a Car
Lower Monthly Payments: Leases often cost less per month than loan payments.
Drive a Newer Car: You can drive a newer model every few years.
Fewer Maintenance Worries: Most leases cover the car during its warranty period, so repair costs are minimal.
Depreciation: The dealership is liable for the depreciation. Aim to get a lease where the vehicle depreciates more than the cost of the lease.
Cons of Leasing a Car
No Ownership: You don’t own the car, so you can’t build equity.
Mileage Limits: Exceeding the allowed miles (e.g., 10,000/year) can incur extra fees.
Customization Restrictions: Modifying the car is usually not allowed.
Ongoing Payments: You’ll always have a payment if you keep leasing new cars.
Return of Vehicle: You must return the vehicle as you originally received it. Normal wear and tear or the replacement of tires will add to the cost of leasing.
Leasing vs. Financing: How to Decide
Choosing between financing and leasing depends on your current preferences and financial situation.
3 Factors to Consider
How long do you want to keep the car? Financing is better if you plan to keep it long-term, while leasing is great if you like to upgrade every few years.
How much do you drive? If you drive a lot (more than 10K or 12K per year), leasing might cost more due to the additional mileage fees.
What’s your budget? Leasing can free up cash flow with lower monthly payments, but financing builds long-term value. Regardless of leasing or financing, below are some rules of thumb to consider.
Rules of Thumb for Car Affordability
To avoid financial strain, consider these guidelines:
Total Price: Spend no more than 35% of your annual gross income on the car.
Monthly Payment: Limit your car payment to 15% of your monthly net income.
Total Monthly Costs: Ensure the monthly costs are less than 10% of your monthly gross income. This should include monthly payments, gas/electricity, insurance, and maintenance.
3 Tips for Financing a Car
Down Payment: Aim to put at least 20% down on the car to reduce financing costs.
Loan Term: Stick to 4 years, but no longer than 5 years for manageable payments but not too much interest.
Interest Rate: Compare rates from banks, credit unions, and dealerships to get the best deal.
Need Help Buying or Leasing a Car?
Whether you’re deciding between leasing or financing a car or planning your next big financial step, we’re here to help. Let our advisors guide you toward a decision that fits your goals and budget.
Should You Lease or Finance?
Leasing best suits those who value driving the latest car models and prefer lower monthly payments, but it doesn’t offer ownership.
Financing is better for long-term savings and drivers who want full control over their car.
No matter your choice, ensure it aligns with your budget and driving habits.
Final Thoughts
Leasing vs. financing a car is a personal decision influenced by your lifestyle, driving habits, and financial goals. Consider the pros, cons, and tips outlined here to make the best choice for your next vehicle.
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