Should You Lease or Loan?
You’ve done your test drives. You’ve found your favourite colour and picked the options you have to have. Now the big question: “How do I pay for my next new vehicle?”
For those not able or not wanting to pay cash to buy their new vehicle outright, the “lease versus loan” question is a tough one; especially when factoring the variety of finance and lease terms being offered in a very competitive new vehicle market.
The 2008 financial crisis resulted in a significant decline in new car sales and many automakers decided to get out of the leasing business. In recent year though, the new vehicle market is a competitive and growing one, and leasing has found its way back into the marketplace as a viable financing option.
Though leasing has made a comeback, rates aren’t as low as they were seven plus years ago and residual values are also not quite has high driving larger amounts to finance. With this on mind doing your homework on “lease versus loan” is more important than ever.
As you know, leases and loans are two available financing options. One pays for the use of a vehicle; the other funds the purchase. And each has its upside and downside.
Say you’re looking at financing an $18,000 new vehicle. When you get a loan, you have to borrow for the entire $18,000 – plus interest charges, plus sales taxes, plus administration fees – all up front. When you lease, you pay the difference in what the vehicle is worth today new and what it will be worth used at the end of the term (which is usually 36 to 48 months). If that $18,000 vehicle has an estimated resale value of $10,000 after 48 months, your lease payments only cover the $8000 in depreciation – plus interest charges, plus sales taxes, plus administration fees.
You can spend the better part of a day working an auto manufacturer web site researching “lease versus loan” scenarios. But in the end, each calculation will roughly end up with similar pay-me-later leases or pay-me-now loans.
Which is why when tasked with the decision to lease or loan, new vehicle buyers should also look beyond financial comparisons (rates, terms, residual values, required deposits, administration fees, rebates), and consider their utility, economy and driving lifestyle priorities:
• What is more important to you? Long-term cost savings or lower monthly payments?
• Is driving a new vehicle every two or three years with no major repairs more appealing than possible long-term repair costs?
• Are you a person that likes to own your vehicle with no limitations, as opposed to lower usage costs and no down payment?
• Is having your vehicle paid off appealing, even if that means higher monthly payments for the first few years of ownership?
• How long do you want to use this vehicle, do you want something new every few years or are you a person that owns their car to end of the car life?
In the end, leasing usually doesn’t build equity, while purchasing a vehicle over time does.
Generally speaking: leasing equates to lower payments, no equity; borrowing equates to higher payments, with some equity.
With either option, choosing a vehicle that will retain its value well after three or four years is essential, and you will benefit in the long run.