Sept. 29, 2021
So, you’ve got your dream car picked out. You’ve been driving by the dealership and seeing ads for a great deal. You decide to drive into the lot and the dealer is promising you a great total cost for this brand new car. You sit down at the finance table and the finance agent says “buying or leasing?”
Is this something you’ve thought about before? What is the difference? Which one will work best for you?
To find out, let’s compare the pros and cons of each option to see which option will be best for you today and for your financial future.
Buying a Vehicle Outright
If you have the total price of the vehicle in your bank account and can afford to pay for the vehicle with the cash you have on hand, then this option is for you. With this option, you own the vehicle outright and there are no interest rates or finance fees. However, don’t forget about the taxes and additional maintenance that come with purchasing a vehicle. Taxes on a vehicle will depend on your province or state.
If you can afford it, this is the best option as it avoids costly interest rates and finance fees. It also means you have the freedom to use the vehicle how you wish and can take it anywhere you would like for maintenance. However, if you can’t afford the full cost of the vehicle upfront you still have options!
Financing a Vehicle
If you cannot afford the full cost of the vehicle, dealerships can offer finance plans either in-house or through a third party (such as a bank).
This finance plan is a loan for the vehicle that the dealership or the third party provides that you pay back over time. This loan will come with interest rates, which are determined by your financial profile. The finance department will take a look at a variety of factors to decide what your payments and interest will be. Some of these factors include your employment and your credit score. When you apply for a car loan, they use a “hard” hit on your credit score, so be cautious. The more hard hits that show up on your credit score, the less likely they may be to give you a loan.
When you choose this option, dealerships may require a downpayment to cover a portion of the price of the the vehicle and to provide them a sense of security that you will be able to make your bi-weekly loan payments. Some dealerships may have promotions offering $0 down, but watch out for the increased interest rates or fees. $0 down doesn't mean the financing is less, it just means that you don't have to pay a portion upfront.
The Pros of Financing
- You own the vehicle once you have paid off the loan.
- Your car may be easier to sell down the road.
- You do not have a limit on the annual mileage or usage.
- You can sell or trade-in your vehicle at any time.
- You can modify the vehicle (although it may void the warranty).
The Cons of Financing
- The value of your vehicle will depreciate, which means taking a loss when you sell the vehicle again.
- You are responsible for vehicle maintenance and failure to maintain the vehicle will result in a lower resale value.
- Taking out a car loan may negatively affect your credit, especially if you cannot make your payments on time or you fail to make your payments at all.
- You need to research different options to make sure you get the best rates. Don't assume the dealer is offering you the best deal you can get.
How Financing Affects Your Insurance
Your insurance company will require that you list the dealership or financial institution you are financing through on your insurance policy. While they do not have to be listed as an owner, having this information on file ensures that the insurance satisfies the requirements of the financial agreement. Your financial agreement usually requires you to have full coverage on your vehicle.
Leasing a Vehicle
Leasing is similar to financing a vehicle, however, at the end of the lease term, you will not own the vehicle. At the end of the lease term, you will either give the vehicle back to the dealership or you can choose to pay for the remaining balance on the vehicle to buy it. Essentially, you are paying bi-weekly to rent the vehicle.
Leasing may require a fixed down payment, a down payment equivalent to the first month’s lease payment, or another requirement determined by the dealership. In the lease contract, there will be a cap on the mileage you can put on the vehicle.
Before you consider leasing, keep track of your annual mileage (or just 1 month and multiply by 12). Leasing contracts usually require you to upkeep warranty and maintenance requirements as well. This ensures that the vehicle is in good condition when you have to return it.
The cost of leasing a vehicle is determined by the total cost of the vehicle, the length of the lease, expected mileage, taxes, fees, and leasing rental charges.
At the end of the lease contract, you must return the vehicle to the dealership. At that stage, you can choose to buy the vehicle or choose another, either at that dealership or from somewhere else. This is one of the reasons why dealerships like leases—when you’re physically back at the dealership to return the vehicle, it gives them another opportunity to make a sale on your next vehicle.
Dealerships also like leases because it keeps the used-car supply of low-mileage, gently-used vehicles steady. They can boost the resale value of these vehicles compared to trade-ins that may have mechanical issues or high mileage.
The Pros of Leasing
- Leasing usually has lower interest rates than financing.
- There may not be a down payment required.
- You are not affected by the depreciation of the vehicle.
- You can decide when the lease contract is up at a pre-determined price.
- Dealership decides when and where to maintenance your vehicle which saves you the time and potential stress of deciding where to go.
The Cons of Leasing
- You have to return the vehicle at the end of the leasing contract.
- You have to adhere to the usage rules in the leasing contract. If you go over the annual mileage, they may void your contract or face additional charges.
- You must adhere to all of the maintenance and warranty requirements.
How Leasing Affects Your Insurance
While the insurance rate usually isn’t drastically different depending on whether you are financing or leasing, you may be required to file the paperwork differently. Because you do not own the vehicle, the dealership or financial institution providing the lease contract may be required to be listed on your insurance. You must report the required mileage to your insurance company—the annual mileage may increase or decrease your insurance cost.
Which Option is Best?
You have to decide if you are ready to commit to owning a vehicle for the long term. If you are, financing a vehicle may be the best option for you. You may face higher bi-weekly fees, but you will achieve your end goal of owning a vehicle.
If you are not sure if you are ready to commit to vehicle ownership and can adhere to the requirements of a lease contract (i.e. mileage and maintenance cost) then leasing may be right for you. At the end of the contract, you can still decide to finance the vehicle or purchase it outright.
Before you even choose financing or leasing, make sure to call your insurance company to get a quote on the new vehicle. New vehicles are much more expensive to replace and the cost to insure them may be more expensive that you might expect. When you’re considering your financial options, you need to do some research to see if you can afford both the insurance and the bi-weekly payments.
The Bottom Line
You must choose the best option that’s the most comfortable for you financially.
Whichever option you choose, make sure to consider all the financial responsibilities before signing on the dotted line. It can be easy to get drawn in by the siren call of a shiny new car and a dealer convincing you to drive off the lot today.
Take the time, think about your financial future, and pick the option that will make you feel great driving out of the lot and down the road for years to come.