You’ve finally saved up enough money for a down payment on a brand new vehicle, negotiated a price you’re happy with, and now the dealer asks if you want to finance or lease. This is a complicated question, and which is better depends on how you plan to use the vehicle, so which should YOU choose? Here we’ll break down the Pros and Cons of each so you can make an informed decision.
Financing Pros:
- You own it! When you finance a vehicle, you own that vehicle and can do with it what you like, like modifying or customizing.
- Able to sell it, and get out of the payments if your situation changes.
- You’re building equity. At the end of your loan, if you trade that vehicle in, you can use its value as a down payment towards your next vehicle.
- Flexibility on loan term. You can decide to finance the vehicle for as few or 2 years, or up to 6 years in some cases which lets you have a lot of control over your payment.
- No mile restrictions: Leases have limits on how many miles you can drive per year, and you pay a penalty for every mile over that limit which can end up being very costly. When you finance, you don’t have to worry about keeping track of miles or worry about going over.
Financing Cons:
- Higher payments: Since you’re paying for the full cost of the vehicle when financing, this can end up having a higher monthly payment (depending on how long you finance the vehicle) compared to lease where you just pay the depreciation.
- Higher down payment: Many leases tend to have lower down payments for similar monthly payments compared to loans.
Now on to leases. With a lease its important to realize you do not own the vehicle, you’re simply ‘renting’ it for a long period of time, and this affects what you can do with the vehicle.
Lease Pros:
- Lower monthly payments: Since many leases come with strong incentives from the manufacturer, they usually allow you to get a lower monthly payment with an equal down payment compared to financing the same vehicle.
- Always under warranty: Most leases are 2 to 3 years, with basically all major manufacturers covering this period with their full warranty, so its unlikely you’ll have an issue that isn’t covered by your factory warranty.
- Can simply ‘walk away’ at end of the lease. Hate negotiating when buying a new car, especially negotiating the value of your trade-in? With a lease, you simply walk away at the end of its term.
Lease Cons:
- You don’t own the vehicle: You can’t modify or alter a leased vehicle in any way unless you plan to fully restore it to factory at the end of your lease.
- Penalties for damage. You’re required to return the vehicle at the end of your lease in a condition consistent with a vehicle of its age. If theres excessive door dings, scrapes, an odor of smoke or anything else when you turn in the vehicle, you will be charged to restore the vehicle.
- Mile penalties. Leases generally limit you to 12k miles per year, with the option to get a 10k or 15k mile limit (some luxury brands have lower mile leases that can save you money if you don’t plan to drive it often). If you turn in the vehicle with more than this many miles, you will pay a penalty. You don’t get money back for being under the mile limit.
- No Equity. When you turn in your vehicle at the end of the lease, any down payment on your next vehicle will be out of pocket since you will not have a trade-in.
- You’re stuck until the end. If your situation changes and you no longer want the leased vehicle, its extremely difficult to get out of your lease, and if you do, you’ll likely pay a hefty penalty.
So which to choose: Lease or Finance? If you’re someone who always gets a new vehicle every 3 years to have the newest features, and don’t drive that many miles then a lease may be a great option for you! If you’re rougher on your vehicles, or tend to drive more miles, then you may want to finance to avoid potential penalties. Just keep in mind that even on a lease, you can still negotiate price so be sure to get a good deal!