Financing vs. Leasing Your Next Vehicle

If you can just walk into Bud Brown Volkswagen and write a check for the full amount of a new car, good for you! You can stop reading. 

The rest of us have to figure out how to pay for our rides over time. Purchasing through financing is often the default line of thinking. But there is another option that has been around for decades, known as leasing. Leasing is common in many forms of business, but many people who purchase things every day, have never leased anything in their life aside from an apartment. Is leasing a car a good idea? Should you consider it or stick with financing? Let’s look at the pros and cons of both financing and leasing.

The Basic Steps of Financing a New Car

Financing a car involves determining two groups of money. What you have in cash you can put down upfront, and what you agree to pay monthly. The general rule for a down payment, as determined by lenders, is a minimum of 10% to 20% down payment on the loan.  If you have a vehicle to trade in, that can count as part of it. 

You choose your lender. It can be a bank or credit union if you belong to one, or the captive financial institution of the dealer. Dealer financing can often be the best option because of the incentives Volkswagen of America is offering. It simply pays to research all your financing options.

Your monthly payment will depend on the term of the loan (how long before you pay it back) and the interest rate. The latter is dependent on the prime lending rate – which fluctuates with the state of the economy and your credit score. With each payment, you pay toward the principal – the actual cost of the car –  and the interest.  Every amount paid in principal reduces what you owe on the car.  Once the loan is paid off, you are the legal owner of the car. The payments are gone, and you can sell it, keep it, or give it away if you want. You can sell the car while still making payments, but part of the sale will go to paying off the loan. 

Basic Steps of Leasing a Car 

Aside from an upfront cost of fees and taxes, leasing often requires no down payment and operates simply on the monthly payment for the length of the lease, which is usually two to four years. At the end of the lease, you turn the car back to the dealership. At this point, most people lease another new car, but you will have the option to purchase the car you just leased, but unless you have been saving up, this will likely involve  financing.

Since a leased car is technically not owned by you, there are usually terms that limit the accrued mileage and wear and tear on the car at lease-end with fees for exceeding either. In some cases, mileage limits and other lease restrictions can be negotiated in advance. 

If you use a car for business, there can be some tax advantages to leasing, but this is highly dependent on specific circumstances. This must be discussed with your employer or accountant before determining if the tax advantages apply to you.

Leasing Pros and Cons

Pros

• No down payment required: You can lease a car with less money upfront. However, having money for a down payment will reduce your monthly payment
• A nicer car: Generally, you will be able to get a more expensive car for the same monthly payment when leasing over financing.
• No-cost maintenance: Most leased vehicles have a bumper-to-bumper warranty, which means you aren’t responsible for maintenance during the leasing period. If something unexpected goes wrong, the warranty usually covers most of the cost.
• Continually drive a new vehicle: Leasing makes it easy to continually hop from a 2 – 3-year-old vehicle to a new one.

Cons

• Mileage restrictions: Mileage restrictions often range from 10,000 miles to 15,000 miles per year, with a fee of somewhere between 10 and 25 cents per mile over the limit.
• Wear and tear fees: Upon the lease end, the dealer will evaluate the car for wear and tear. And charge you a fee for what they consider too many scratches, dings, scrapes, or tears. 
• You always have a car payment: You never have the opportunity to pay off a car and just drive it. Unless you have been saving money to purchase after your lease, you can be in a position where it is difficult not to lease again. Plus, subsequent leases will likely be more expensive to get the same type of car.
• You don’t control when you get your next car: If you see a car you want coming out in six months, but your lease is up next month, you won’t be able to wait before securing your next car.
• Ending a lease early can be expensive: If things change and you can’t afford your payments or you don’t need the car, ending the lease early usually involves a substantial cost. 

Financing Pros and Cons

Pros

We can break down the pros, but they all boil down to one thing: You own the car. You have the freedom to do what you want with it. You can drive it as much as you want, as hard as you want, sell it when you want, and customize it as you want. If it gets damaged, it is up to you how to fix it. As long as you keep making payments, your lender doesn’t care what you do with the car. And, of course, you can keep it as long as you want, possibly using the time you have no payments to save up for your next down payment. It also lets you take advantage of offers such as the Bud Brown Advantage Lifetime Warranty.

Cons

• Higher upfront costs. You need to muster up the down payment, and chances are your financed payments are going to be higher than lease payments for the same car. This will likely provide a greater limit on the vehicles you can afford.
• Greater complexity: If you arrange your financing separately from the dealer your car purchase can be a multi-step process, whereas leasing is usually a single-step process at the dealership. 
• Cost of maintenance: Financing a car means you’re responsible for most if not all, maintenance costs. With a lease, most of these costs are covered. If you’re planning to finance a car, make sure to budget for these costs to avoid surprises in the future.
• More expensive to stay in a new car. The newer the car, the more it depreciates, so if you wish to stay in a one to three-year-old car, continually replacing newer cars can get very expensive, and each transaction will be more complex than leasing on an ongoing basis. 

People have had positive experiences with both financing and leasing. Most still choose ownership. While leasing once rose as high as 33% of all new vehicle transactions, it has dropped to about half that now. Bud Brown Volkswagen Sales Consultants are well-trained in the ins and outs of both options, but the decision of what is best for you is ultimately dependent on your desired relationship with your car. If you always like to always have the newest model and features, leasing may be more for you. If you want more freedom in what you want to do with your car and how long you want to keep it, ownership through financing may be the better route.