Leasing used to be something that mainly appealed to luxury car buyers or corporate account drivers in Mississauga and Brampton. With nearly one third of car sales credited to leasing, taking out a car loan or paying cash are no longer your only options. The more expensive cars become, the more often we see people leasing as an alternative to buying. That said, you may want to weigh the pros and cons of leasing or buying to see which option works best for you. How you use your car and taking the honest temperature of your financial situation will help to determine whether you should buy or lease.
Benefits of Leasing
Leasing a car is very similar to financing, with some crucial differences. When you buy a car outright, the loan value is based upon the entire cost of the vehicle, minus the down payment and any trade-in value. With leasing, you’re financing the depreciation that occurs during the lease term (usually about three years), plus associated fees. When the lease is up, you simply return the car to the dealership. This can be a terrific option for those of you who really enjoy having a new car every few years and appreciate the latest in tech and safety features.
Unless you may a very large down payment or your trade-in had top-value clout, a monthly lease payment will be lower than a monthly car loan payment. With a lease, you pay the difference between the car’s price and what it’s predicted to be worth at the end of the lease period. This is known as its residual value. More math can prove helpful as you make your decision. Let’s say your dream car is a brand-new SUV that costs $30K, and you’re able to make a down payment of 10 percent ($3,000), but you don’t have a trade-in. The amount you’d need to finance would be $27,000.
With any lease, there’s a predetermined residual value. If it’s 55 percent, or $16,500, you’d only make payments on the $13,500 worth of use that you’re anticipated to get from the vehicle. That’s half the price of purchasing it outright. It’s why lease payments are most often lower than finance payments, but don’t forget about standard additional fees. For car shoppers with smaller down payments, leasing can be a very good option if the terms are right. Car leases do work the same way as purchases: the more money down, the lower the monthly payment, but as we mentioned above, the payments are calculated differently.
Leasing can also help you to know your exact costs of ownership. The average lease period is about three years, typical of a standard new-car bumper-to-bumper warranty. Unexpected repairs are usually covered by the lease warranty. Maintenance such as oil changes, tire rotations and manufacture-recommended tasks and updates will be required at your end of the agreement. Failure to attend to proper maintenance (and document it) during the lease period can result in extra fees when the lease is up. Also appealing to some: no need to worry about selling the car or scoring a decent price for your trade-in vehicle. If you’ve followed the mileage and maintenance rules in your agreement, you can turn in the car and the end of the lease period and walk away.
You might not know about the mileage caps on leased vehicles, and again, it comes down to how you use your vehicle. Hefty penalties are imposed when you exceed the mileage limits in your lease agreement. These mileage caps generally range from 14K to 24K a year, with 19K being a common median cap. You really do need to estimate how many kilometres you drive per year and round it up to the mileage limit available on your lease. Going over that limit will result in a per-kilometre fee that could break the bank. Leasing is probably not a great idea for frequent cross-country road trippers, for example.
Dealers want that car back in its original condition, minus normal wear and tear. Any major changes to the car made by you will need to be changed back before you hand the car over again. Read the fine print about what’s allowable and what isn’t. Every lease will have different terms and conditions. Don’t make assumptions. If you’re someone who derives pleasure from modifying a vehicle, leasing might not be the ticket.
Many consumers turn their noses up at leasing because in essence, a lease means you’re really just renting the car for a few years. When a lease ends, you have no equity in the car, and zero value to apply as a down payment on your next vehicle. If you end up wanting to buy the car at the end of your lease, you’ll have to take out a loan proper. The loan on a used car incurs a higher interest rate, so you may feel like you’re paying far too much for a given vehicle.
Having a very solid credit score is a typical requirement to qualify you for a car lease (especially those with manufacturer subsidies). If your credit score is less than stellar, consider waiting to lease until you can up your credit score, or look for a certified used car with a similar monthly payment. While some lease options do exist for buyers with poor credit, as in when you take over someone else’s lease, but more often than not, it can be trickier than purchasing a new or used vehicle.
Read the contract carefully to assess the fees and penalties cited in the lease agreement from inception to conclusion. Just because the lease has ended doesn’t always means you get to drop off the keys and stroll into the sunset. Your leasing agent might very well present you with a sizeable ding for excess mileage, failed maintenance or damages.
Benefits of Buying
If you like to drive the same car for a long time, buying will probably suit you better than leasing. When you buy, you own the car outright—or through your loan provider till it’s paid off. But throughout the length of the loan period, you gain equity, provided that your payments outpace the depreciation of the vehicle. At the end of a car loan, the car belongs to you. The title is transferred to your name and you will no longer have a monthly payment to figure into your ownership costs. Another benefit to buying over leasing is the absence of mileage restrictions. If you live in a rural area or, like many in Mississauga and Brampton, have a significant commute, this can be a huge advantage to buying.
Drawbacks of Buying
Market value fluctuations directly impact new car buyers. While good predictors of future market value for specific models do exist, you can never be sure about how changing market conditions might impact a trade-in or resale value. With leasing, if the car is worth less than the predicted market value by the end of the lease, it’s 100% not your problem. If you have a car loan and the car is worth less than the loan balance, you have negative equity. Now, this is only a drawback if you plan on selling it or trading it in, because you’ll have to come up with the difference. Many dealerships will offer to roll that deficiency balance into the financing for your next car, but that’s not an ideal situation.
Large down payments are another reason to opt out of buying. With many lenders requiring 10 to 20 percent down, you have to be able to swing it. For a $30K vehicle, you’d have to have $3,000 to $6,000 saved up. Accidents or other ill-timed circumstances can force you to replace a car immediately. Buyers with excellent credit may be able to find a lender that waives the down payment requirement and offers 100 per cent (or more) financing on the price of a new vehicle, but for many purchasers, that’s not possible.
While trying to arrange for monthly payments that fit your budget, you may be talked into extending the length of the loan. Some new loan products out there can extend payments out for eight years plus. But your car loan should never feel like a mortgage. Interest rates on these loans tends to be higher and in the long run, you are overpaying. If you do have to sell the car while you’re still paying it off, that negative equity we mentioned before becomes a definite issue. If you live someplace where a car is essential and lack the funds for a sizable down payment, you may not be able to avoid this option unless you look at leasing.
There’s actually no cut and dry verdict on whether leasing or buying is “best.” Every prospective car buyer should consider all pros, cons, and costs involved. Take a good long look at your actual budget and be very honest with yourself about your predicted mileage, lifestyle, and of course, your credit history before you decide.