There are pros and cons to both leasing and owning a vehicle. Leasing generally has lower monthly payments, while owning lets you build equity towards a vehicle you own. When you’re in the market for a new car, comparing the differences between leasing and owning will help you find the best option for you and your budget.
Purchasing a Vehicle
Financing a purchase of a car is fairly straightforward. You agree to a purchase price with the dealership, then decide if you want to finance tax and license or any of their loan protection products. Next, you choose a term for how long you wish to finance (usually 36-84 months). The lender sets the interest rate for the term and amount you are financing, which is generally most influenced by your credit history. Your monthly payments are calculated by the entire amount financed, the interest rate, and the length of your term.
Leasing a Vehicle
Leasing a vehicle is a little more complex. The dealership or lender establishes the residual amount, or estimated value of the vehicle at lease end, as well as the service charge factor dependent on the term of the lease. With longer lease terms, it is more difficult to accurately estimate the value of the vehicle – which generally makes the service charge factor higher. Predicting the value of a vehicle four or five years from now is difficult, since the sales market for given vehicle types can’t be controlled. However, other factors that influence the value of a vehicle, like mileage or longevity, can be controlled. That’s why almost all leases have annual mileage restrictions (usually 12,000 miles a year), and maintenance requirements for the leasee to maintain in order to keep the vehicle in good working condition.
Purchasing vs. Leasing Considerations
Will you keep the vehicle 3 or more years?
If you intend to keep the vehicle for several years, then purchasing is usually the better choice. While the monthly payments will generally be higher than with a lease, a portion of each monthly payment is paying down the principal balance on your loan. Over time, the amount between interest and principal converges and more of your monthly payment is allocated toward your principal balance and building equity in your vehicle. Assuming that the auto sales market stays relatively stable you will usually have enough equity to trade or sell your vehicle in three to four years. This gives you multiple options to build your financial wealth:
- If you like the vehicle, continue to pay your monthly payments until you own it. Once the vehicle is yours, you won’t have a monthly payment, which frees up income to put towards other things.
- If a new vehicle catches your eye, sell or trade in your car
- If you do not intend to keep the vehicle for more than two to three years, then leasing will almost always be the better option. Generally you must pay the tax and license amounts up front in addition to the first monthly payment. This can range from $1,200 to $5,000; depending the amount of the vehicle. With a lease, you will not own the vehicle nor will you build equity; but you don’t need to worry about the stability of the sales market for that particular vehicle. At the end of your lease you will have a few options:
- If you are ready for a new car, you can turn your leased vehicle in to the dealership or lender. Assuming that you’ve stayed within the mileage restrictions, have no damage to the vehicle and have performed customary routine maintenance and there are no other lease terms; your obligations to the lease agreement are complete.
- If you decide that you are in love with the leased vehicle and want to keep it, you can pay the residual amount (the amount that was agreed to at the beginning of the lease should you choose to purchase it after all of your lease payments have been made).
What if you are still not sure?
Request that the dealership provide a quote for financing both a lease and a term loan. Add up all of the payments, down payments and the residual amount to compare the lifetime cost of both options. Sometimes visibility to total cost can help make the final decision.
It’s also helpful to consider the following:
- Do you mind tracking mileage?
- Do you have an alternate vehicle or transportation should you exceed the miles?
- Do you normally repair dents, larger scratches or other non-regular wear & tear?
- Do you prefer changing vehicles frequently?
- Do you have an affinity for “owning” vehicles?
- Do you like to customize your vehicles (new stereo, paint, after-market parts, etc)?
Answering these questions should help you make a decision on which option is right for you.
There’s no right or wrong answer when it comes to purchasing a vehicle vs. leasing – it comes down to which option is right for you. Some people prefer the shorter lease term, while others want to build equity into something they own. Whether you decide to lease or buy, First Tech offers various loan options to make it happen.