Before you get a new car, one of the most important decisions you have to make is whether it’s better to lease or finance it. Since buying a new car is one of the biggest things you will purchase, you have to be very careful and take the good, the bad and the ugly of each option into account.
Both leasing and financing have their advantages and disadvantages. It is up to you to decide whether you want to own a car for a longer period of time, but make large down payments and relatively high monthly payments, or lease a new car every three or four years, which comes with significantly lower monthly payments.
Benefits of Leasing
In general, leasing is a more convenient option for those who don’t want to make a large down payment, or simply can’t afford it, and want their monthly payments to be as low as possible. There are many no-money-down leases, which means you don’t have to pay anything upfront and just make the monthly payments, which are usually lower than for buying a car.
This is because you are only paying for the deprecation for the term you are leasing. You are also only paying sales tax on the payment, not the whole car. With leasing, you are always driving a newer car with the newest technology and safety features. When putting low miles on a car, most of the time you save on maintenance when it comes to major service intervals and new tires.
With leasing, you have more options at lease end. You can buy the lease out, trade it in, sell it outright or turn it in and walk away. In many cases, in a business situation, you are able to write off the entire lease payment instead of depreciating it out on your taxes. When talking about how to do this, it is best that you consult your tax professional.
In the case of rolling negative equity into your next loan, with a lease, you save interest and time only paying for that during the lease term of three to four years, rather than a finance purchase of six or seven years. Knowing you will be back to a break-even point at the end of the lease is sometimes comforting.
Downsides of Leasing
The biggest drawback of leasing is that you don’t own the car and are not building equity. Let’s face it, most people who finance a car put little down and the bank really owns it anyway. This essentially means that you are renting the car, and you don’t have anything to show for the money you have spent on monthly payments. The second drawback is that you are locked in for the lease term. Because you are making less of a payment and getting more car, if you try to get out of the lease early, you will be upside down. In other words, you will have negative equity in the lease. There are options of rolling over the negative equity into the next lease or finance option, but that puts you further behind.
Benefits of Financing
If you want to own your car, then you should consider financing your new purchase. After you have paid the loan off, you get to keep the car, and you can sell it or trade it in to the dealer. You then would use the money to make a down payment on a new car. How much it would be worth would depend on the quality of the car and how many miles you put on it.
Another advantage of financing is that you can drive your car as much as you want without having to worry about mileage limits. If you lease a car, you will have to pay a certain fee if you exceed the limit that the lessor has set, which is usually somewhere around 15,000 to 20,000 miles per year. Some leases offer anywhere from 10,000 miles to 20,000 miles.
Downsides of Financing
The high monthly payments are the biggest drawback of financing. They can be as high as $600 or $700, depending on the car’s sales price and how much money you put down. In any case, the monthly prices for financing are significantly higher than for leasing, and you are also required to make a down payment of at least 10 percent on the car’s purchase price depending on your credit. Another drawback of financing is most people have to finance the car for longer terms to keep the payment down. When you have to keep the car longer to pay it off, you stand to pay more in maintenance the more miles you put on the car.
The Bottom Line
In conclusion, in order to be able to choose the option that’s right for you, you have to take into consideration how much you are willing to pay each month, whether you intend to drive more than 20,000 miles a year, whether you want to drive a new car every three years and if you are fine with driving the same car for five to seven years. A good retailer that has a great Google review can consult with you about the right choice. QCBN
By Dave “Mac” Macfarlane
Dave “Mac” Macfarlane is the general manager of Findlay Subaru Prescott. Contact him at Dmacfarlane@findlayauto.com or 928-771-6900.