Finance Vs Leasing: Which Is Better
What are your goals? We all have different prioritiesin cars, life, and finances. When deciding on leasing vs. financing, what’s right for one person can be totally wrong for another.
Generally, leasing offers lower monthly payments than financing, as well as the benefit of owning a new car every two or three years. However, financing offers its own set of advantages.
Luckily, we have a team of finance experts who are happy to help you find the best option for you. Call or any Go Auto dealership to book a free consultation.
You Will Always Have A Car Payment
Want to get out of debt and stay out of debt? Having a continual car payment is a sure way to stay in the hole. When a car is leased it is many times for a term of 3 years. At the end of this time period its time to turn the car in and get another lease.
Leasing an automobile with a payment has nothing to show for it when the lease term is complete. You are basically renting a car for the term of the lease. If a used car is purchased, there often times is some value left to sell it in order to get into another used vehicle when the time comes.
Why Leasing A Car Is A Bad Idea
Do you feel like you have to have a car right now? But at the same time, you dont want all the cons that come with owning a car
- Models that depreciate +40% over the years
- Periodical repairs and maintenance costs
- Down Payments and documentation
Affording a good car isnt a problem. What if you buy the model you want, but years later, you no longer want it? Youre going to spend a long time trying to sell it. And if you bought it new, the depreciation will do its thing.
Buying might be cheaper than financing, but its too much commitment. If youve never bought a car before, you will likely want to try different cars in the future before buying.
So you might have thought of renting as well. But whether you pick short or long-term, both monthly expenses are just as high. Its not a good idea unless you need to travel somewhere like a foreign country.
What if you could afford a car worth +$30K for $200 per month or less? Leasing allows you to do that.
But do you think the dealers will let you get away with paying less? Theres always a catch somewhere.
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An Alternative To Financing A Car
An easy way to avoid taking out a loan for a car is to save for your next car before you need one. I am currently driving a car that is 7 years old. I estimate that I can drive it at least 3-4 more years before any major repairs might come up. While Im not sure that I would sell my car in 3-4 years , I know that I need to be prepared.
If I start saving now , I could save a $167 per month for the next 4 years and have $8,000 to put towards my next car purchase. When you consider that my car will still be worth $4,000, that means I can buy a car worth $12,000 in cash. The best part is that this means I dont ever have to stress about how my wife will get to work or how I will pay for necessary repairs. By simply planning ahead and saving first, you can avoid the same horrible situations.
Do You Finance Your Car Purchases?
Is Leasing Ever A Smart Option
Heres the ugly truth: For most people, leasing doesnt make financial sense. Buying a car is almost always better than leasing a car, Baumeister stresses.
There are some exceptions for business owners or others who can deduct certain vehicle costs. For everyone else, leasing a car should be considered a luxury.
Lease a car if you simply love driving a new car every three years and the cost is worth it to you. As long as youre aware, its fine to make a conscious decision to spend more for your cars than might be necessary.
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Drawbacks Of Buying A Car
Higher monthly payments: When you buy a car, youre probably going to spend more each month. For example, the average monthly payment for those who bought a Jeep Grand Cherokee was $637 $159 more than an average monthly payment for leasing it, according to Experians State of the Automotive Finance Market report issued in the first quarter of 2020.
Bigger down payment required: If you put more money down, of course, you can reduce the size of those monthly payments, but it will take a bigger chunk of your savings.
Long-term maintenance costs: Lastly, owning a car comes with the same mix of pride and potential problems as owning a house: It feels good to say you own it until you have to pay to fix it when something breaks.
Pros And Cons Of Leasing Vs Buying A Car
Do you want to drive your own car but you are unsure of deciding while to lease a car or purchase a car? Leasing or buying a car is your choice but when you lease a car, you pay charges for driving the vehicle for a fixed period. There are many car leasing pros and cons that make the choice questionable for the buyer.
Lets address all the pros and cons of leasing vs. buying a car to ease your decision before investing.
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Financial Experts Like Dave Ramsey Frown On Leasing A Car
If youre not familiar with how leasing a car works, then its easy enough to check out a few videos on YouTube in order to educate yourself. However, we must warn you that there are plenty of videos created by financial experts, like Dave Ramsey, which do include some false explanations when it comes to leasing.
According to Ari Janessian an auto broker for Boston Automotive Consulting finance experts, like Ramsey, tend to over-exaggerate the terms of the most typical leases. For example, Jannessian points out in his video that Ramsey has told his audience that there is anywhere between a 60 to 70% depreciation over the course of three to four years when you own a car. However, thats not true.
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According to Janessian, you can expect about a 30 to 50% depreciation hit when you lease a car for three years and its money factor isnt as high as Ramsey proclaims, either. In Ramseys video titled Why is Leasing a Car Bad? he tells his audience that most leases have an interest rate of around 14%.
Depending on your credit profile, thats typically not true. According to Nerd Wallet, most money factor rates are at around 2 to 5% if you have good credit, 6 to 9% if for average credit, and 10 to 15% for poor credit. In some cases, if the manufacturer has incentives for leasing one of its models, then there could be a special rate of 1 to 2% available for top-tier lessees.
You Dont Own The Vehicle
This is probably the biggest disadvantage of car leasing, and one that will be a deal breaker for some. One of the most common reasons why people are hesitant about car leasing is that, once the contract is up, they will have nothing to show for it.
Unfortunately, there is no way around this. This is simply the way with car leasing. If you really want to own your car, then you should look at something like a hire purchase or personal contract purchase. For more information on these, you can read our article about leasing to own at the end.
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Shopping For A New Car Maybe Your Current Ride Has Some Wear And Tear Or Youre Interested In Switching To A Car With Better Gas Mileage If Youre Wondering Whether Your Best Move Is To Lease Or Buy A Car Its Worth Considering Both Options
If youre looking for the most cost-effective option over the long term, buying a used car and keeping it for a few years after youve paid it off is often the best choice. But what if you like having the newest technology or the most-up-to-date safety features? Leasing might give you the freedom to make the periodic upgrades youre looking for without breaking the bank.
The truth is theres no one-size-fits-all option when it comes to the age-old question of lease or buy. Still, identifying some key factors related to cost and your personal preferences can help you decide whats right for you.
Lets look at some of the important factors you should consider before talking to a dealer.
The Car Dealer And Leasing Company Always Win With A Lease
Like any business, car dealers are there to make money. This is understandable with any business looking to make a profit or even sometimes ones that claim to be non-profit. Not so understandable in the last one, but it does happen.
With a lease, the car buyer is set up from the beginning to pay more for the vehicle. When a car dealer takes the car back at the end of a lease term more payments have been made on it than it has depreciated. This is partly due to their mileage restrictions. The condition of a car will also be taken into consideration, but if there is damage the car dealer will get paid for this. Even a damaged auto, the leasing company will still win.
Once the lease has been turned in, a dealer will then either sell the car to the person that leased it or to someone else. A buyout option will be offered to the person that leased the car and this will be an amount that is much more than the automobile is worth. Either way, the leasing company will make money at this point when a lease is turned back in. This is in addition to the money they already made on the lease.
The truth is car dealers make much more money leasing a car than they would be selling one for cash.
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Comparing The Costs Of Leasing Vs Buying
To get a sense of how the costs differ when you drive off the lot, consider the breakdown below that shows the costs of leasing or buying a 2020 Toyota Camry over a six-year period.
The cars estimated price is $25,925, and both options assume you drive 15,000 miles each year. Remaining value is based on Edmunds depreciation estimates. This also assumes you find the exact same three-year lease deal twice in a row and make the same initial payment. These figures do not include tax, title, license and registration fees.
Its important to note that you can make an impact on the costs of buying by opting for a shorter loan. For example, if you adjust the 72-month loan for the Camry above to a 60-month loan, the monthly payments would increase to $373, but you could qualify for an attractive 0 percent financing deal that eliminates interest charges. Youd also own the car outright in five years instead of six.
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A Better Car Buying Choice
The better auto buying choice is to buy used and pay cash. Dont fall for the lower payment new car sales tactics. Moreover, dont ever get into a car payment discussion with a car dealer. They will find a way to fit a person into a car payment that is at their advantage. Always discuss price only. The best practice may even be to talk finance rate and price. Then, pay cash for the car.
Car buying is never fun in my opinion. It is exhausting and time-consuming. As long as car dealers are able to advertise on a thin line of deception, they will always have the upper hand. Unless a person takes the time to gather as much information as possible to avoid the pitfalls of sales schemes that are less than truthful, a car leasing deal will be a disaster.
If you are the type of person that must have a new car, save the cash to buy one. Do not ever lease a car.
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Reasons Its Smart To Lease A Car Right Now
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Buying a vehicle is a commitment even in the best of times. A down payment ties up a lot of ready cash. You make payments for 48, 60 or even 84 months. And worse, the car loses value as soon as you drive it off the lot, which means you may owe more than its worth for years.
Thats not a great fit in this pandemic-driven recession, where flexibility and adequate emergency savings are keys to financial survival.
Right now the answer to the lease-or-buy question “is a very big ‘yes,’ for leasing,” says Oren Weintraub, president of Authority Auto. He’s advising clients of his car-buying concierge service to at least consider leasing because of the current economic conditions.
You can put little or no money down. You can select a shorter term than a car loan. And the risk of massive depreciation down the road is borne by the bank, not you.
A lot of buyers are coming to the same conclusion: The percentage of buyers who use automakers’ finance arm and choose to lease has risen from 31% to 52% year over year, according to industry analyst J.D. Power.
Disadvantages To Car Leasing
Keep in mind there are drawbacks to leasing. If you drive a lot of miles, you may find it more cost-effective to buy the car and keep it. Most leases cap mileage anywhere from 10,000 to 15,000 miles per year. Put more miles on the vehicle and you open the door to excess mileage cars, some of which can range as high as 25 cents per mile. You could face the prospect of paying thousands when it comes time to turn in the vehicle.
In addition to mileage, the lessee must cover any damage or excess wear and tear on the car. Scratches and dings are considered normal wear and tear, but make sure to read the fine print to determine what excess wear and tear looks like and for what and how much you are liable.
Remember that a lease is a contract and youre committing to making the payments for the duration. If you decide you want out, you may be liable for the balance of your payments. Be sure to carefully check the lease to determine your liability.
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There Are Additional Costs
One of the biggest misconceptions about leasing a car is that there are a number of hidden costs. While there are additional costs you have to think about, theyre certainly not hidden. Not as long as you go through a reputable broker, anyway.When you lease a car, you have to have fully comprehensive insurance which will be more expensive than your standard third party. You also have to get it serviced which can be costly. And, of course, if you go over your mileage or damage your car, you will face extra charges, because you have gone outside the scope of your original agreement. But, were sure youre not going to spend that much money on a car and not look after it.
However, these are not hidden. These costs will be made known to you before you sign anything or agree to anything. So, while there are extra costs for you to think about you shouldnt be put off by people telling you there are hidden costs. If you go through a reputable broker they will be completely transparent about what you are paying for. For more information on additional costs when leasing a car you can read our article here.