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Similar to many car shoppers, you may find yourself contemplating the difference between financing and leasing when it comes time to get a new vehicle. Both of these options have their pros and cons, which you have to carefully consider to make the right decision. Check out this comprehensive guide to better understand the differences between financing and leasing a car.
Financing and leasing are both ways of getting a vehicle through a monthly payment plan, but they have their differences. When you finance a vehicle, you’re actually taking out an auto loan to purchase it. To pay back the loan, you have to make monthly payments to your lender, along with interest. Under normal circumstances, you’ll eventually pay off the loan and become the outright owner of the car. However, if you default on your loan, your lender has the right to take possession of your vehicle.
On the other hand, if you lease a vehicle, you won’t own it at the end of the agreement. This means you’re essentially renting a car. You need to pay a monthly fee to your lease provider for the privilege of using the car. In most cases, you have the option to buy the vehicle at the end of the lease term. A lease agreement is different from a loan in that it comes with an annual mileage limit and an extra fee for excessive wear and tear.
To give you a clearer idea of the differences between financing and leasing, let’s take a look at this example. Our chosen model is a 2021 Chevrolet Equinox LS with an automatic transmission and front-wheel drive, which has a manufacturer’s suggested retail price (MSRP) of $28,265. At Applegate Chevrolet, you can get this model for $24,026 after cashback. The terms for financing and leasing this vehicle are as follow:
Financing: After your loan application is approved, you have to repay the amount you owe within 60 months at an interest rate of 5%. You aren’t trading in a vehicle and decide to make a down payment of $5,000.
Leasing: Suppose you lease a new Chevrolet Equinox without a trade-in or down payment. Your lease agreement lasts for 39 months and allows you to drive 10,000 miles a year. When the lease ends, the vehicle is in excellent condition and has minimal wear and tear.
Financing or leasing a 2021 Chevrolet Equinox can result in significantly different monthly payments, even though you’re driving home the same vehicle. Find out how much you need to pay each month in both situations:
Financing: If you choose to finance your new Chevrolet Equinox, you’re required to pay $360 per month. Although this amount isn’t too much, it’s still a considerable financial burden for the average American.
Leasing: If you sign the 39-month lease agreement, the amount you need to pay every month is only $208.
As you can see, financing a vehicle requires you to assume a much bigger financial obligation compared to leasing. This is one of the main reasons why an increasing number of drivers are choosing leasing over financing.
The example above shows that leasing a vehicle is more cost-effective than financing in terms of monthly payments. However, monthly costs aren’t the only factor you should take into consideration. To make a better-informed decision, you need to compare the benefits of financing and leasing.
Vehicle ownership: The main advantage of financing a vehicle is that you’ll own it at the end of your loan term. Once you pay off your loan, you have an asset that you can sell for a substantial amount of money. When it comes time to replace the vehicle, you can trade it in to significantly reduce the price of the new car you want to buy.
Potentially lower overall cost: Financing a vehicle and driving it for a few years after you pay off your auto loan may be the most cost-effective way to own a car. The longer you use your vehicle, the lower your total cost of ownership.
No mileage limit: If you want to have the freedom to drive your car as much as you want, it’s a good idea to buy it. As mentioned earlier, a lease has a monthly mileage limit and charges a considerable fee for excess mileage.
No restrictions on customization: Purchasing a vehicle is a better option if you plan to modify or upgrade it to suit your personal preferences and tastes.
No loan debt: With leasing, you only pay for the vehicle’s depreciation over the lease term. Since you aren’t borrowing money, you’ll never be upside-down on a loan, a common situation where a vehicle owner owes more than their car is worth.
Lower repair costs: If the vehicle you lease remains under a manufacturer warranty for the entire duration of the contract, you don’t have to worry about paying a large repair bill out of your own pocket. You’re still responsible for regular maintenance, but it shouldn’t cost a lot.
Access to the latest automotive technologies: Getting a new car lease every few years means you’ll always have access to the most up-to-date comfort and convenience features, infotainment technologies, and safety systems.
Easy approval: If your credit score is less than impressive, you’ll probably have a hard time getting an auto loan. Car lease requirements are generally more lenient because the dealership can easily take back your leased car if you fail to make payments.
Basically, if you want to own a vehicle for a long time and use it as you wish, you’ll be better off getting a car loan. Leasing is a more suitable option if you prefer to keep your monthly expenses low and drive a new vehicle every few years. If you need advice to make the right choice between financing and leasing, contact us to speak with one of our finance experts.
