Leasing vs Financing a New car: Which is Better?
One of the most common questions that car buyers often asked is whether it’s a better idea to lease or to finance when buying a new car. There are a lot of important things to know about both leasing and financing new cars. And To understand all the benefits and downsides and to figure out which one is the best option for you, make sure to stick around to the end of this article.
Short Term Vs long term – Financing a Car
One of the most important things that you need to establish when figuring out whether it’s a better idea to lease a car or finance a car is to first establish whether you are a long-term person or a short-term person.
A long-term person is someone who buys a car with the intention of keeping it for at least seven to eight years or potentially even longer than that even until the wheels fall off.
A short-term person on the other hand is someone who switches their car every few years either because they just don’t like to be in the same car for too long, they don’t like to deal with long-term repair costs or they just like the feeling of having a new car every few years.
It’s very important to be honest with yourself and know exactly what type of buyer you are because there’s plenty of people who buy a car thinking that they’re going to hold on to it for a very long time only to trade it in a few years down the road and end up losing a lot of money.
When you buy a new car only to trade it in a few years down the road there’s a good chance the value of that car is going to be a lot lower than what you owe on the loan.
This is what we call negative equity and when you trade in a car that has negative equity you’re going to end up owing a lot of money on the new car that you buy.
You need to be honest with yourself and determine whether you’re the type of person that holds onto their car for a long time or if you’re the type of person that wants to get into a new car after a few years.
If you’re the type of person that holds onto a car for a long time then financing definitely makes a lot more sense than leasing and it could actually be a much cheaper way of buying a car too.
What Is The Differance Between financing/Leansing a new Car?
The main differences between financing and leasing is that when you finance a car you’re making payments on the total purchase price of the car and once you finish making your payments you now own that car.
With leasing, however, you’re making payments on a portion of the total price of the car which means that you do get lower payments but also means that you’re left with a buyout amount at the end of a lease.
You can either pay for that buyout amount in full if you want to keep the car or you can just return the car back to the dealership and then start the process all over again.
The main reason why financing can actually cost less money than leasing is that you get to keep the same interest rate for the entire price of the car. Let’s go through an example to show you exactly what we are talking about.
For this example of financing versus leasing we have chosen the 2021 toyota corolla. The reason we have done that is that at the time “October 2021” Toyota was actually offering the exact same low-interest rate for both financing and leasing 0.99%.
If we look at the numbers for financing first the total price of this car with fees, taxes, and everything else in is going to be $29,279 and that’s going to give us a monthly payment of $622.20 over 48 months or four years. So if we add up 48 months of payments that’s going to give us a total cost of borrowing of approximately $29,856 which means that we will have paid just about 600$ in interest over the period of four years which is not bad.
Leasing Vs Financing A Car – Comparison
So let’s take a look at the lease example now. For the exact same car, 48 monthly lease at the same interest rate of 0.99% and we also have the same price as well $25,911 plus tax that’s going to give us the same total after tax.
All of that leaves us with a lease payment of $344 a month over 48 months, and if we add up all of those payments that means the total cost of this lease is going to be $16,512.
That’s not bad but let’s say you want to keep this car at the end of the lease. Well if you want to keep the car you’re going to have to pay the buyout amount which right over here is $12,045.
If we add that amount of $12,045 to our total cost of borrowing for the lease $16,512 that’s going to give us a total of $28,557 which sounds pretty reasonable but you have to understand that with a lease buyout, you cannot finance that balance at the same interest rate of the lease.
If you want to finance that $12,000 buyout you’re going to have to go to your own bank or some other lender which most likely is not going to be able to give you a low interest rate of 0.99%.
The important thing to understand here is that you cannot finance your buyout amount at the same low-interest rate as your lease. If you want to finance the buyout you’re going to have to go to a bank and get a car loan Which often has much higher interest rates.
When it’s better to finance a Car?
Let’s say the bank is only able to give you an interest rate of 4.99% on the buyout well that’s a lot higher than 0.99%. So once you add all the extra interest that you’re going to pay on that loan it would have been cheaper if you just financed the car in the first place.
The point here is that if you know that you’re going to keep the car at the end of a lease then it makes sense to just finance the car in the first place because that way you get to have the same low-interest rate throughout the entire price of the loan.
Not only does financing a car usually end up costing you less than leasing when you factor in the total cost of borrowing but holding onto a car for as long as possible is usually the cheapest way of owning a car.
When it’s better to Lease a Car?
If you only keep a car for a short period of time and your total cost per mile is going to end up being pretty high but if you hold on to a car for a very long time for as long as possible and drive it as much as possible then your total cost per mile is going to end up being way lower.
Not only does financing a car and holding on to it for as long as possible end up costing you less money but there are a lot of conditions with leasing that you need to be aware of.
When you lease a car you can only drive at a certain amount of mileage per year and if you go over that mileage limit you’re going to end up paying some pretty heavy penalties depending on how much driving you do.
When you lease a car you also need to make sure that you keep it in really good condition otherwise at the end of the lease you could end up paying some pretty heavy wear and tear costs when you return that car back to the dealership.
Finally, when you lease a car you have to remember that you’re fully committed to that car for the entire lease period, if you decide to break a lease early it could end up costing you a lot of money.
Having said all that there are many cases where leasing can make a lot more sense than financing, especially in the case of short-term people who’ve decided that they only want to hold on to a car for a few years.
Some people just like being able to get into a new car every few years and being able to take advantage of all the latest features and technology that they offer.
Leasing can also make a lot of sense for business owners who are able to deduct the lease payments as a business expense, it could end up saving you a lot of money on your income. And sometimes certain cars just have very good lease deals available if it’s a car that has very low interest rates for leasing and other similar lease incentives or if it’s a car that has very high resale value there’s a good chance that you could score some really low lease payments.
Leasing also makes a lot of sense for a lot of high-end luxury cars or forign cars which are known to have very expensive repair bills at a warranty and can also drop in value very fast after four or five years.
If you’re the type of person who just can’t tolerate spending a lot of money on repairs or expensive repair bills down the road then leasing makes a lot of sense for you.
Like we said earlier in the deciding whether to finance or lease a car basically comes down to whether you’re a long-term person or a short-term person. If you’re the type of person that holds on to their car for as long as possible and wants to have the lowest cost of ownership then financing usually makes the most sense.
But if you’re the type of person that just wants to get into a new car every few years and not worry about repairs then leasing might be the better option for you.