- although owning your vehicle (eventually) is a goal for most people, for some people there's an advantage in leasing to ensure you'll always drive the latest and greatest and pay a lower monthly charge.
- deals including zero-percent financing, especially in this time of the coronavirus, make it highly desirable to purchase instead of lease for those who can make it work financially.
- either way, take the time to do the math and understand what you're gaining (or losing) by your choice.
decisions. decisions. life is full of them, especially when it comes to shopping for a new car, truck, or suv. the first decision in this process is arguably one of the most important: should you finance or lease? the answer is more complicated than it appears, because you have to consider your financial situation (a.k.a., what you can afford) and identify what you want from a new vehicle. to help you navigate this potentially unfamiliar territory and make an educated decision, we've identified some of the major advantages and disadvantages of leasing versus buying—and vice versa.
leasing versus financing 101
for those who don't know the difference between leasing and financing, allow us to set the stage.
leasing a new car is basically a rental agreement where payments are made to borrow the car for a specific period of time. however, once the contract expires, the vehicle must be returned to the dealer. the leasee gets nothing in return and likely needs to start the shopping process all over again.
financing a new car is essentially making payments to own the car forever (0r at least for a long time). while this path is typically a better investment, new vehicles tend to quickly depreciate, and most limited warranty periods only last between three and four years or 36,000 and 50,000 miles.
when financing, the buyer pays the entire cost of the vehicle over the course of the loan. leasing is a different—and slightly more complex—process wherein the lessee pays the difference between the sale price of the vehicle and the vehicle's depreciated value over the term of the lease. both methods will have some sort of interest element, but that depends on the interest rate set by the lender.
pros and cons of financing
ownership can be an advantage to consider when you're considering financing a new car, according to tony basich, managing director at carlease.com. he said those who can afford to put money down as equity on a new car will most likely choose to buy that car. plus, there are currently zero-percent financing offers that are very attractive to folks who want to take out a loan. however, demand can lead to popular models being overpriced, so basich said shoppers should be aware of dealer markups when looking at all-new or redesigned models.
along with the ability to pay off the loan and have no car payment, financing a new vehicle gives an owner the flexibility to modify it the way they like, according to ronald montoya, senior consumer advice editor at edmunds. this is more important to the enthusiast crowd, who might want to tune their car's engine or lift the suspension on their truck. of course, we always recommend consulting your warranty materials to ensure that any modifications—specifically performance parts—don't render it void.
unsurprisingly, the advantages of financing a new vehicle often correlate with the drawbacks of leasing. for example, unlike with a lease, there are no mileage restrictions when you finance. you can drive your new toy as much as you want without being anxious about the number displayed on the odometer. on the flip side, the more quickly those miles accumulate, the sooner you'll be out of a warranty. finally, the monthly costs are higher to finance a new car, truck, or suv than they are to lease the same model.
pros and cons of leasing
the whole lease versus finance debate is often dictated by your mentality. while the finance crowd is arguably more concerned with overall investment and making a long-term commitment, those on the other side of the aisle tend to prioritize the ongoing protection of a factory warranty and enjoy the novelty of having the newest technology every few years. montoya compared the latter to some people's obsession with owning the latest smartphone, and it's hard to argue with the satisfaction that we get from anything fresh or futuristic. still, apart from keeping up with the joneses and the peace of mind that comes with always having a warranty, basich said the biggest benefit of leasing compared with financing is the overall cost of ownership.
"leasing offers a lower payment than traditional financing. if you were to take the total of lease payments over three years and the total three-year cost of financing the vehicle, you can see the advantage," he said. "with the current steep trend of new-car devaluation, leasing offers no risk, as it is not your car."
likewise, the lower costs associated with leasing a new vehicle can let you afford a nicer one than if you financed. montoya said the reality is that a lot of people structure their finances on what they can pay per month, and it's a lot more palatable on a lease. and even though mileage restrictions can initially be a sticking point for people who consider leasing, it's just important to monitor your driving habits and ownership history. montoya points out that if you keep track of how many miles you drive in a year, you'll have a better idea of how high or low the mileage cap on your lease should be. also, if you're someone who tends to get bored of your wheels every couple of years, it might mean a lease is a good fit.
how to recognize a good lease deal
those who make the decision to lease instead of finance will want to consider a couple of other details besides their monthly payment and mileage limits before signing a contract. shopping around and finding the best deal seems pretty obvious, but don't be afraid to contact multiple dealerships and compare each of their offers on the model that you're interested in.
manufacturer and dealer websites are excellent sources of up-to-date lease deals. however, be aware of deceitful dealer advertisements that promise low monthly payments, because, as carlease's basich points out, those promotions leave out numerous fees and taxes that can significantly increase your actual payment. plus, those ads usually refer to base models without the most desirable options and with low mileage limits.
finally, make sure you negotiate the terms of your lease; don't just accept the dealer's initial offer. ask questions and make sure you understand and are comfortable with the final monthly payments. try to avoid having a down payment (or at least get it as low as possible) when negotiating a lease. montoya said there's no long-term benefit to putting money down on a lease, apart from making your monthly payment slightly more palatable. "i encourage people to ask when they get a price quote to see the effects that different down payments will have on the monthly payment."