Hey! I’ve been thinking about getting a new car and this would be my first time getting one so i don’t really know all the ins and outs. I really just wanted to come on here and ask what the difference between leasing and financing is. And any other advice on getting a car is welcome but not necessary. thank you!!
In: Economics
Leasing: You pay money every month to rent a car for a few years. The car is never yours, and you give the car back at the end of the lease period.
Financing: The bank lends you money to purchase a car. You pay money every month to pay off this loan. You own the car completely once you’re done paying.
Leasing has a lower monthly payment than financing, and generally a shorter period of 2-3 years. You are essentially renting a brand new car, and there are restrictions on mileage limits etc. At the end you give back the car, although you often have the option of purchasing it at a more favorable price than it will be advertised for to everyone else. Often you also have less maintenance to pay for (depending on the deal).
Financing is taking out a loan, usually through a bank affiliated with the dealership. You can come in with your own financing though. But sometimes there’s a promotional interest rate that’s favorable. You pay the price of the car plus interest over the life of the loan and at the end you own the car. You can get a new or used model as well.
Financing means that you are borrowing money to buy the car.
Leasing means that you are renting the car and have to give it back when you are done.
**The advantages of owning the car:**
– When the payment period is done, you own the car.
– Once you own the car, aside from off-warranty maintenance costs, you can run it for years without having to make any payments and you can sell it for its value to buy another car.
– You own it, so you can always sell it if you don’t like it. But cars depreciate rapidly, so you’ll never get what you paid for it. Selling a car in the first couple years of ownership is rarely a good idea.
**The downsides of owning a car:**
– It’s more expensive month-to-month during the payment period
– Cars depreciate in value very quickly, and a lot of people don’t like owning older cars or beaters
**The advantage of a lease are:**
– The monthly payments are usually lower making it more attractive to a lot of people.
– Since the lease period usually matches the warranty period you don’t have to worry about maintenance as you can bring it back to the dealer if there’s a problem.
– Once the lease is up, you can immediately lease a new car so you are always in a newer car with an active warranty at a lower monthly rate.
– There’s typically a buy-out option at the end of the lease where you can buy the car
**The downsides of a lease:**
– It costs you a lot more in the long run
– You are stuck with the car, if you hate the car you can’t sell it and it’s tough to get out of a lease agreement
– Buy-out clauses + a lease will cost you more than financing in the first place
– Leases have restrictions of have many miles you can put on the car, and there’s a financial penalty if you exceed it
– At the end of the lease you can face unexpected fees like being over the mileage limit, or due to damage to the car, etc
**Overall**
– Leasing a car is rarely a financially sound option unless you’re a business and a car is an expense, or you’re the type of person that really loves always being in a newish car.
– Cars depreciate so fast that buying a used car is almost always a more financially sound option overall
– Car maintenance is nothing scary, and paying to fix your car is cheaper than buying a new car because you don’t want to fix it.
Leasing is a form of a long term rental where the lessee has certain rights as specified by the contract. For example, the lessee is responsible for registering the car and doing basic maintenance. You don’t typically need to do that if you rent from Hertz.
The benefits to leasing are the same benefits you get from leasing your housing, you aren’t ‘on the hook’ for it long term. Since you can give it back after three years, you don’t have to worry about depreciation, which is normally huge on so-called ‘lease machines’. A corollary benefit is that the lease contract usually includes a set value a the end of three years AND it gives you the right of first refusal *at that value* regardless of the actual value of the car. So, if you lease a $76,000 SUV and the reserve value is calculated to be $38,000, then at the end of the contract they must offer it to you at that price. If you are returning a lease and the salesman is desperate to get you into a new lease, chances are they figure they can sell your car used for more than the contract value if you buy it out.
You typically want to lease high value depreciation items. Boats, planes, cars, whatever. Hell, even movie studios typically lease cameras and lenses for shoots rather than own them. Half the planes that major airlines operate are actually leased from a holding company and are often re-leased out to a different airline. So united might lease the jet, then lease it to some other airline for some amount of time. Leasing is how you avoid the proverbial financial boat anchor.
The negatives to leasing are, mostly, that people don’t read the contract carefully. If you lease for 10,000 miles a year and do 15,000 AND want to give it back, you will be on the hook for the overages. There are often ‘outs’ to that, but again, you need to read the contract. It can also happen that if you LOVE the car and want to buy it, the reserve value may be higher than the resell value, so it might not be a great deal. If you plan to keep the vehicle for 10 years, then leasing doesn’t really make sense unless you are super artful about how you manage the buy-out.
Financing, which almost always takes the form of a simple interest loan, is a lot more straight forward. You and the bank buy the car from the dealer, then you make structured payments from 48-72 months until the balance is paid off. With rates being what they are, the finance charge on that SUV I mentioned above can be very high, like $10,000. What that means is after I have made all the payments, the total I will pay will be the price of the vehicle at time of purchase + all interest payments. The trick here is to pay as much as you can as soon as you can, 8% interest is a lot less painful on $20,000 of debt rather than $40,000 – which is close to the average of a new car. Thankfully, with simple interest loans, they can only charge you interest that has accrued to that day. So if you make your regularly scheduled payment, then pay again a week later, that payment will go wholly to principle minus 7 days of interest. Interest is calculated daily and applied monthly unless you are doing a payoff quote, then it is to the day. Additionally, the laws in the USA changed after 2008 and all but entirely eliminated early pay off fees.
If this all sounds very confusing, it is because it is, and that is by design. The financial industry thrives on making things seem harder than they actually are, if they didn’t then half the financial services jobs wouldn’t exist. To better arm yourself, familiarize yourself with the simple interest formula, the compound interest formula, amortization schedules (you can just download an excel template for that), interest rates, and typical loan terms and conditions. Investopedia is a great resource if you need more guidance.
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