Getting a new vehicle is a significant financial milestone. And aside from purchasing a home, having a car is one of the biggest expenses individuals or families incur. Unless you plan on purchasing your next vehicle outright with cash, you generally have two options—leasing or financing.
The debate of buying vs. leasing is often met with strong opinions. Each option has its advantages and disadvantages. Keep reading as we explore the benefits and drawbacks of buying vs. leasing a car to help determine which option is ideal for your financial situation.
What Is The Difference Between Leasing And Financing A Car?
The concept of leasing is similar to renting in the sense that you don’t have ownership of the vehicle. When you lease a new or used car, you’re obligated to return the vehicle when the term is up. From there, you can sign a new lease on a different vehicle or buy it. When leasing a vehicle, your monthly payments generally include the vehicle’s expected depreciation value, various fees and other associated costs.
When you finance a car, you can view it the same way as purchasing a house with a mortgage. With each monthly payment, you continuously increase your equity in that vehicle. When the loan is paid off, you become the sole owner of the vehicle. If you purchase a car with an auto loan, the funds are repaid to the lender for the cost of the loan plus any added interest. Qualifying for an auto loan may be an easier route if you meet credit score and other requirements set by the lender.
Pros And Cons Of Leasing A Vehicle
Leases are ideal for individuals who want to keep their monthly payments low, experience the latest automotive technology and keep a relatively easy maintenance schedule.
The number of leased cars on the road has skyrocketed in the last decade. According to the Bureau of Transportation Statistics, new vehicle leases increased by nearly 79% from 2010 to 2020. Additionally, in 2021, approximately one in four (25%) vehicles on the road were leased.
Let’s delve into the advantages and disadvantages of leasing a vehicle to help you determine if leasing is the best option.
Benefits of leasing a car
- Lower monthly payments: Leases on new vehicles typically have lower monthly payments and general overhead than financing a car with an auto loan. That’s because you’re essentially paying for the expected depreciation value throughout the term of the lease.
- Relatively low maintenance: Newer vehicles generally don’t have many maintenance issues, especially within the first few years. Leasing allows you to stay within the manufacturer’s warranty. Additionally, most dealers offer lease maintenance packages, which may cover the cost of oil changes and brake repairs.
- Experience the newest in vehicle design and technology: The standard 36-month or three-year lease allows drivers to experience the latest cutting-edge designs, features and technology.
- Straightforward end-of-lease process: When your lease term ends, you simply return the vehicle to the dealership. If the car is free of damages and you remain within the mileage limit, you’re all set. At that point, you can determine if you want to lease with the same dealer, go to a different dealership or purchase the vehicle.
Disadvantages of leasing a car
- Long-term cost: Only leasing vehicles will be more expensive in the long run because you will consistently be in a cycle of paying for the car. As opposed to financing, when the car loan is paid off, you no longer have to make payments on it.
- Mileage restrictions: Leases stipulate that you won’t exceed the agreed-upon mileage limit. If you exceed the limit, you may have to pay a hefty fee at the end of the lease. The fee amount may vary depending on the dealer, but generally, fees can be between 15 to 20 cents per mile over the limit.
- No ownership: Unless you choose the buyout option at the end of the term, you’ll never fully own the vehicle.
- Gaps in maintenance coverage: Damages beyond standard wear and tear are typically not covered in lease maintenance packages.
Pros And Cons Of Financing A Car
The financing option is ideal for drivers who want to keep their vehicle longer than the traditional 36-month lease and those who eventually want to own their car. Financing is prevalent in the United States. According to the Federal Reserve Bank of New York’s Center for Microeconomic Data, there were more than 113 million auto loans in the United States as of the second quarter of 2021.
Let’s delve into the advantages and disadvantages of financing a vehicle to help you determine if purchasing is the best option.
Benefits of financing a car
- Ownership: When it comes to financing, you build equity with each monthly payment. After the loan is paid off, you become the sole owner of the vehicle. There’s a chance that you can drive the car for a few years without making a payment. Due to advances in vehicle technology, modern cars can last for a while.
- No mileage limit: When you purchase a vehicle instead of leasing, you don’t have to check the mileage consistently. You have the freedom to drive the car as much and as far as you would like without the worry of additional fees.
- The ability to trade in or sell: Since you own the vehicle, you have the freedom to decide if you want to sell them a car or trade it in at any time. If you find yourself facing financial issues, you can leverage the equity you’ve built to earn some extra cash.
Disadvantages of financing a car
- Steeper monthly payments: When you finance a vehicle instead of leasing, you generally will pay more in monthly installments. For example, Experian’s Q1 2022 State of the Automotive Finance Market report found that individuals who purchased a Honda Civic paid on average between $111 to $417 more in monthly payments than someone who leased it.
- Long-term maintenance costs: Owning a vehicle means you’re responsible for paying to fix any of the damages. In fact, the maintenance costs nearly double when it comes to a five-year-old car vs. a ten-year-old car.
- Selling at a depreciated value: It’s well known that once you drive the car off the lot, it has already lost value. When you’re ready to sell, you most likely will lose money on it.
Frequently Asked Questions
Here are some common questions regarding leasing and financing vehicles.
Can you modify a leased car?
The general answer is no, with very few exceptions. Since you’re not the owner of the vehicle, you are required to return it to the dealership in the same condition as you originally got it. Of course, normal wear and tear are expected. Generally, dealers expect any damages to the exterior not to exceed more than the size of a quarter. The customizations usually allowed on a leased vehicle include:
- Tinted windows that are typically handled by the dealership
- Wheel and tire upgrades
- Radio and electrical systems only agreed upon by the dealership
- Exhaust and intake systems only agreed upon by the dealership
Can you trade in a financed car for a lease?
Yes, you can trade in a financed car for a lease. When it comes to trading in a finance vehicle for a lease, you’ll want to ensure you obtain a trade-in estimate to determine if the value of the financed car is less than what is currently owed.
Is insurance more expensive for leased cars?
Insurance premiums will depend on your insurance provider. However, leased vehicles generally come with higher insurance premiums. That’s because you’re not the owner, and the dealer wants to ensure they’re well covered in an accident.
Secure Auto Financing Through Arizona Central Credit Union
Ultimately, the decision to go with leasing or financing will largely depend on your current financial situation and your long-term goals. If you’re interested in swapping out a new vehicle every few years to enjoy the latest in cutting-edge designs and technology, leasing may be right for you. However, if you eventually want to become a vehicle owner, financing may be the ideal route for you.
Still, wavering on what is the best option for you? Check out Arizona Central Credit Union’s Leasing vs. Buying a Car Calculator. This tool allows you to input figures to help you decide which option is the best for you.
If you’re interested in financing, consider getting preapproved through Arizona Central Credit Union. Our competitive auto loan rates will get you into your new vehicle fast. Visit our auto loans page for additional information or to apply today.
