Guide to Leasing vs Buying

You’ve made the decision: it’s time to get a new car.

Now you’ve got to decide on how to pay for it. You can either pay for the car in full, finance it or lease it. Let’s assume that you don’t have a pile of cash set aside for that first option. This narrows your choices down to two: leasing and financing.

But how do you decide which is the right choice for you? And what about all that financial lingo dealers throw around, what does it all mean?

FINANCING

THE BASICS

When you think of financing, just think of loans. By financing, you’re essentially spreading out the full asking price of the vehicle over a longer period of time. This is done by borrowing the money you need from a financial institution like a bank or credit union, commonly referred to as the lender.

First, you apply for the loan for the vehicle, which an institution may or may not grant you based on your credit history. Once you get credit approval, you pay a down-payment towards the loan — usually at least 20% of the cost of the vehicle, – but you can put down whatever you can reasonably afford. The bigger the down-payment you make, the less you’ll need to pay per month. After you make your payment and sign all the appropriate paperwork the car is yours! You’ll just have to make monthly payments to the lender until you’ve paid back the full amount you borrowed.

PROS

  • Full ownership of the vehicle
  • No mileage limits
  • No excess depreciation or mileage fees
  • Build equity in the vehicle

CONS

  • Locked into your choice of vehicle for longer
  • Higher monthly payment
  • Limited warranty coverage

HOW DOES FINANCING WORK?

If you’re financing a vehicle, you’ll be applying for credit. The total amount you will pay per month depends on multiple factors including the price of the vehicle, the Annual Percentage Rate (APR) and the length of the loan terms (shorter loans typically have lower rates but higher monthly payments). Loan terms for vehicles are typically 36, 48, 60 or 72 months.

As you make monthly payments the loan amount will drop to zero and you will own the vehicle completely.

SOME TERMINOLOGY:

  • DTI – DEBT TO INCOME
    DTI determines your available income. It includes all outstanding debts including rent/mortgage, monthly utility bills, credit card debt and other loans you may have. DTI should be under 50%.
  • PTI – PAYMENT TO INCOME
    PTI is the amount of the monthly vehicle payment compared to your monthly gross income. A reasonable PTI is around 15%.
  • LTV – LOAN TO VALUE
    LTV is the amount financed compared to the vehicle’s worth. If you finance a car for $19,000 and the vehicle’s value is $20,000 you would have a 95% loan to value.

WHAT IF YOU HAVE BAD CREDIT?

Don’t get discouraged! With so many factors going into financing a new vehicle you can still get an auto loan even with bad credit. Before you visit the dealership determine your financial situation and budget. Get a copy of your credit report so you know what to expect in terms of financing. Find a vehicle that fits in your budget and go to a reputable dealer.

SOME THINGS TO THINK ABOUT

  • Make a wise vehicle selection. Aim for the newest, lowest milage vehicle within your means.
  • Put money down to decrease the size of the loan.
  • Having a strong cosigner can help you qualify for the loan.
  • Keep the loan with good payment history for at least 12 months.
  • Don’t shop your credit.

LEASING

If you like the sound of driving something new every few years and saving money when making a down-payment, leasing may be right for you.

When you lease a vehicle, there are no loans involved. You establish lease terms based on how many months or miles you want to drive that vehicle (for example 36 months or 36,000 miles at 12,000 miles per year). You make a down-payment and pay a monthly fee, just as you would if you were financing. However, the down-payment you make is lower when you lease, and your factory warranty covers the cost of typical maintenance issues that arise when you’re buying to own. When your lease term is up or you’ve reached your mileage cap, you must give the car back to the dealership and pay any excess depreciation or mileage fees (if any). The car also must look as close to it did when you got it as possible, so accessories you added have to be removed and permanent alteration or customization isn’t allowed. You may have the choice of buying the car at its residual value, but most people typically lease a different vehicle under a fresh term, or buy a new or used vehicle.

PROS

  • Lower down payment
  • No loans
  • Factory warranty coverage
  • Ability to upgrade to a new car sooner
  • Exchanging vehicles more often gives you a varied driving experience

CONS

  • Mileage and term limits
  • Express depreciation and mileage fees
  • Limited customization
  • No equity in the vehicle
  • No ownership of the vehicle

YOUR LIFESTYLE
WHAT ARE YOU GOING TO DO WITH THE VEHICLE?

It’s also good to keep in mind what you want to do with your vehicle. If you’re planning on hauling boats and trailers around on the weekends or consistently heading off the beaten path, it may be unwise to lease your vehicle. If you damage or scuff up a leased vehicle through regular use, you’ll need to either get it fixed before you turn it in or pay excess depreciation fees when you return it to the dealership, all for a car you don’t own.

And if you plan to put in some serious mileage in your vehicle through long-distance business travel or frequent road trips, you could easily blow past your lease’s pre-established mileage limit. Then, at the end of the lease, you’ll have to pay for every mile you’ve driven beyond that limit, which at 10 to 25 cents per mile can add up quickly!

YOUR GOALS & DIRECTION

WHERE DO YOU SEE YOURSELF IN FIVE YEARS?

If you’re living in a more suburban or rural town right now but expect to be moving to a crowded city in the next few years, you may decide that taking out a loan is not the right move financially. You’ll be locked into a longer-term payment plan, which may become a small burden. For example, you’ll have to regularly pay things like a garage, permit and car insurance fees if you bring your vehicle into the city, all when it may be easier and more affordable overall to just use public transit. If you lease, you can drive the car that you need for the next 36 or 48 months and then cleanly return it before you move into the city.

On the other hand, if you see your living situation changing as you move away from the city or out of state, it may be wiser to finance. You won’t need to come back to return your car to the dealership you leased it from, and you’ll have a vehicle to drive for as many years as you need it. You can even sell your vehicle for some extra income, or give it to your children when they get their drivers’ licenses.

SHOPPING IN GENERAL

FIND THE RIGHT VEHICLE
Before you even get to the lot do a self assessment to determine what you need in a vehicle.


ASK A LOT OF QUESTIONS
If they can’t answer or you don’t understand, it’s probably not a wise investment or the right place for you to buy from.

THEY SHOULD BE THERE TO HELP YOU
If you feel pressured or uncomfortable while making your purchase think about buying somewhere else. You should never purchase something you don’t see the value in.

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