No matter what you do for a living or where you call home, a dependable vehicle can be the perfect way to travel and get things done. While any car can cost a lot of money over the years, the investment is usually worthwhile if it makes life easier for you or your family.
However, if you’re interested in getting a newer or more expensive model, chances are you’re trying to decide between financing it or leasing it. Keep reading if you need help figuring out which car payment option is right for you.
What’s The Difference Between Leasing And Financing A Car?
Although both can be acquired at your local auto dealership and involve similar payment processes, leasing and financing a vehicle are two different options. In fact, by the time you have a basic understanding of how each process works, you may already have some idea of which solution you prefer.
Leasing
A lease essentially allows you to rent a vehicle for an extended period (normally several years), the term length of which is based on the conditions of your contract. How often you make payments (monthly, weekly, bi-weekly, etc.) also depends on what sort of agreement you have with your auto dealer.
In order to leave it with as much value as possible, your contract will cite a specific amount of mileage and wear and tear that you can put on the car (without being charged extra). When your term is over and all payments are made, you just return the car to the dealership, where you can apply for another lease or move on.
You might prefer to lease your car because:
- You can try a different new (or slightly used) car every few years
- You won’t have to take on the responsibility of owning the vehicle
- Some lease deals (especially for new cars) have appealing terms and rates
- Most maintenance and repairs will be covered by the agreement/warranty
- You don’t have to worry about the vehicle losing resale value (depreciation)
- You’ll never have to scrap or resell any vehicles
Financing
Financing is when you purchase a vehicle gradually, using a series of loan payments. The biggest difference here is that you’ll own your car after you’ve completed your payments. In this scenario, there are three places you can apply for financing:
- Bank or Credit Union – If you’re approved, a lump sum of money will be deposited directly into your account or your lender may transfer the funds directly to the dealership you’re working with. Some drivers would rather apply with a bank or credit union because loans are larger, rates are lower and there’s more security.
- Alternative Lender – If you can’t get approved by your financial institution due to bad credit or a low income, some private lenders can offer you a smaller personal or vehicle loan with a higher interest rate and tighter payment plan.
- Dealership – Some dealers offer in-house financing, where you pay them directly instead of applying for a loan elsewhere. Like alternative financing, approval restrictions are often easier. Rates and terms vary from client to client.
You might prefer to finance your car because:
- It can be cheaper and more convenient than consistently leasing vehicles
- When all payments are made, there will be no more interest or fees to cover
- Once bought, the car’s title is an asset that can be resold or used as collateral
- Unlike a lease, there’s no set mileage or wear and tear limit
- You can drive and customize your vehicle however you want
- You may be able to trade it in at the dealer for a lower price on your next vehicle
Pros Of Leasing A Car
The possibility of lower monthly payments
If you are not in the financial position to buy a new car without financing the purchase, then, due to its lower monthly payments, leasing can be very attractive. When purchasing, financing is based on the full value of the vehicle minus your original down payment. On the other hand, leasing only charges the driver based on the difference between the original price and the price after the depreciation of the car. In the end, you’re only be charged the drop in the car’s value over the years you’ve had it.
Always driving a new car
For people who have a low attention span when it comes to cars, leasing is a very attractive option. Leasing can allow you to always have the newest model car with the most recent innovations in technology and features. You’ll also most likely never have to deal with any maintenance headaches if you’re leasing every three years. In the end, you can get more car for less money.
Cons Of Leasing A Car
Higher levels of insurance
If you are constantly going to have a relatively new and higher-end vehicle, you also have to take into consideration that your insurance costs will probably be quite high. It’s true that you can avoid maintenance costs with a leased car, but some of these costs may be offset by having to pay a higher level of insurance.
Leasing requires good credit
If you don’t have good credit, leasing may not even be an option for you. The overall costs of financing during a lease are always higher than loans because at no point do you pay off any principal. Also, most leasing companies require you to have a healthy credit score along with a stable financial situation.
Pros Of Buying A Car
It is easier to budget and plan
When you buy a car through financing, you can calculate exactly how much you will be paying each month and how long it will take you to pay it off. These kinds of certainties are a real asset when staying on track with your budget and planning your future finances (click here to learn how to cut the cost of your car).
You have equity with a bought car
Whether you own or partially own your car, it can still be used for equity depending on your circumstances. If you need to free up some cash, you can always sell your car. Also, if you want some of the perks of leasing, you can also use your vehicle as a trade-in towards a down payment for a newer vehicle.
Cons Of Buying A Car
Incurring expenses from mechanical problems
Once the warranty expires on your vehicle, any mechanical issues that may arise from that point on are your responsibility. You have to anticipate that these costs will become more frequent as the car becomes older. Also, when you want to sell the car, you are responsible for the logistics involved with trading in or privately selling the vehicle.
Should you consider purchasing your next car with cash? Read this article.
Rapid depreciation
As soon as you drive a new car off the dealership lot it depreciates in value and it will only continue to depreciate. Also, variables such as accidents and just general wear and tear will depreciate the value. Lastly, with the fast introduction of new technologies to the car market, your car can see quick decreases in its resale value.
Ultimately, the decision between leasing or buying is unique to each individual. If you want to look at things more short-term, and want more car for less money, then leasing may be appealing. If you are looking for the security that owning your own car offers, then buying may be more your style. Ultimately, you need to decide on a route that best complements your personal preference while at the same time your financial situation.
The Costs Of Leasing vs. Financing
Now, let’s talk about the cost comparison between leasing and financing a vehicle. Although the size and timing of these costs can vary depending on various factors, here are some basic examples using some of the more noteworthy ones:
Example – You find a vehicle with an MSRP (Manufacturer Suggested Retail Price) of $30,000, an annual percentage rate of 5% and a monthly payment plan.
Financing
Short Term (3 years) | Long Term (5 years) | |
Price | $30,000 | $30,000 |
Interest Rate | 5% APR | 5% APR |
Origination Fee | ~ $1,000 (4% of loan amount) | ~ $1,000 (4% of loan amount) |
Down Payment (15%) | $4,500 | $4,500 |
Loan Amount (30,000 – down payment + origination fee) | $26,500 | $26,500 |
Payment Term | 3 years (36 months) | 5 years (60 months) |
Monthly Payment | $794.23 | $500.09 |
Total Paid | $28,592.28 | $30,005.4 |
Total Interest Paid | $2,092.28 | $3,505.4 |
Leasing
Short Term(3 years) | Long Term (5 years) | |
Price | $30,000 | $30,000 |
Interest Rate | 5% APR | 5% APR |
Origination Fee | ~ $1,000 (4% of loan amount) | ~ $1,000 (4% of loan amount) |
Down Payment (15%) | $4,500 | $4,500 |
Loan Amount (30,000 – down payment + origination fee) | $26,500 | $26,500 |
Payment Term | 3 years (36 months) | 5 years (60 months) |
Monthly Payment | $790.93 | $498.01 |
Total Paid | $28,473.48 | $29,880.6 |
Total Interest Paid | $1,973.48 | $3,380.6 |
Keep in mind that the conditions of your specific leasing or financing contract will vary based on where you apply, which car you want, and what your finances look like.
While financing can be pricier initially, you can offer a down payment, which should reduce your payment plan and any interest or fees. Despite leasing being slightly cheaper at first, it ends up costing just as much as financing, but you don’t own the car.
Leasing vs. Financing With Bad Credit
It can be tough to get approved for some credit products and financial services if you have a bad credit score of 600 or lower. Since it could be due to problems with unpaid debt, your lender/dealer will consider you a higher-risk borrower.
So, your approval chances and amounts will be lower than someone with good credit. In addition, interest rates will be higher and repayment plans more restrictive. Unfortunately, this may be the case when you try to finance or lease a car.
Is It Easier To Get Approved For Bad Credit Leasing Or Financing?
As long as you have an income that will support your payments, there are plenty of dealerships that will offer you leasing or financing, no matter how healthy your credit is. However, the costs can be higher than if you don’t have good credit.
That said, if your credit is particularly bad, it can be harder to get approved for a lease than a car loan because you cannot offer any security, such as collateral or a cosigner, so the dealer would be taking more risk. As it would technically still be their property, they could wind up with a car that’s depreciated significantly in value, if you default.
On the other hand, if you apply for easier in-house financing, the car remains the dealership’s property until it’s paid off and they could just repossess the vehicle if you default. As long as the car is in decent shape, it could still be resold someday.
Should You Lease Or Finance Your Next Car?
Lease Your Car If… | Finance Your Car If… | |
Payments | You prefer lower payments | You don’t mind higher payments |
Car Condition | You want to try out new models, different brands and/or new features | You really like a particular car and want the option of driving or customizing it however you want |
Repairs | You want less likelihood of repairs and all maintenance covered under warranty | You don’t mind being responsible for all repairs and maintenance when your warranty ends |
Ownership | You don’t want the car to be your property once your lease is over (less responsibility) | You would rather own the car when your repayment plan is done (for collateral, reselling, etc.) |
Driving Lifestyle | You can stick to a specific mileage and wear & tear limit (any damage may cost you) | You don’t want to be restricted by mileage or potential repairs and would rather drive how you want |
Affordability | You prefer a shorter, cheaper repayment term and don’t mind applying again later on | You don’t mind a longer, slightly more expensive loan term that you only have to apply for once |
Leasing vs. Financing – What If You Want To End Your Contract Early?
Prior to leasing or financing any vehicle, another essential consideration to make is how long you want your repayment term to last. After all, while your payments might be affordable enough at first, you never know what can happen down the line, especially if you lose your job or experience a financial emergency. You may also want to terminate your contract for other reasons, like if you’re moving or are unhappy with your car.
Either way, if you’re in the middle of a leasing or financing deal and you want out of your agreement, it’s important to act quickly and figure out a solution because:
Ending Your Car Lease Early Can Lead To…
- Having to reimburse the dealer for the balance of your remaining payments
- Additional penalties for breaking your contract and any missed or late payments
- Having to pay off any negative equity the vehicle has accumulated
- Needing to cover any wear & tear or accidents the car has gone through
- Being forced to sell or transfer your lease to another driver (also expensive)
Ending Your Car Financing Plan Early Can Lead To…
- Similar (but fewer) penalty fees for breaking your contract
- Additional penalties and interest charged on any late payments
- Repossession of the vehicle if you miss too many payments
- Negative equity (paying more for the vehicle than its market value)
- Your credit score and report being damaged for every defaulted payment
Overall, ending a lease early can be more problematic and costly than a car loan. The extra fees and interest you’re charged when financing depends on the amount of late or missed payments you have. If you negotiate with your dealer and have been making payments responsibly until that point, they may agree to buy the car back, minus any penalties and interest or allow you to trade it in for one with a cheaper payment plan.
If you’re worried about the consequences of breaking your lease, one of the only options left would be to sell or transfer it to someone else, which can be just as expensive and inconvenient as terminating your contract or waiting until it ends naturally.
Looking For The Right Financing For Your Next Car?
Are you in the market to purchase a new car? Loans Canada can help you compare loan options and find the offer that works best for you.
