When it comes to lease vs finance, I think looking at the monthly payment is just the beginning. Making a decision like this can feel complicated. People spend a good deal of time thinking about the financial side of buying a car, but the process of purchasing the car can be fun, too. With all the options available these days, you can find a payment structure that works for you. But should you choose to lease or to finance? Only you can decide depending on your desires and financial means.
Many people make the same mistake when determining how to finance a car. They look only at the monthly payment. Of course, a lower payment is more attractive, but that doesn’t necessarily mean it’s a better payment structure. There are many other variables, including how much you’ll pay over the total financing period, how much you’ll pay in interest, how much you’ll pay for maintenance, how many miles you’ll drive, and how much you’ll pay overall. Only looking at the monthly payment doesn’t give you the whole story.
In this article, I hope to give you the whole story by describing the pros and cons of leasing and financing a car. I also hope to describe when it’s best to lease or finance based on personal driving habits and financial means.
What Is the Difference Between Leasing and Financing a Car?
Ownership is the primary factor in deciding lease vs. finance. A lease is a contract where you are temporarily allowed to use an asset for a fixed period of time, normally two to four years. With a lease, you pay for the expected depreciation of an asset during that period, along with financing fees and charges. At the end of the contract, you have the option to purchase the asset, depending on your lease agreement.
Financing takes a different route. In this case, you purchase an asset using funds borrowed from a lender, and repay the loan with added interest over a set period of time. After the repayment, you are free from the loan and have full ownership of the asset.
I see it this way: with a lease, you pay for the momentary use of an asset, and with financing, you pay for full ownership of an asset. There is no better option. It depends on your preferences for full asset ownership, low monthly costs, and flexibility in use of an asset.
Lease vs Finance: Key Differences at a Glance
Understanding the differences between the various financing and leasing options will help you make an informed decision. While both financing and leasing will allow you to be the driver of the same vehicle, the costs and consequences associated with each decision can be very different.
| Feature | Leasing a Car | Financing a Car |
| Ownership | Leasing company generally owns the car | You own it after the loan is repaid |
| Monthly payments | Often lower | Often higher |
| Mileage restrictions | Usually apply | Generally no contractual mileage limit |
| Vehicle changes | Easier to change cars at lease-end | Requires selling or trading in |
| Customization | Restricted by contract | Generally more flexible |
| End of agreement | Return or potentially buy the car | Keep, sell, or trade the car |
| Long-term value | No automatic ownership equity | Potential to build vehicle equity |
One important detail: lower monthly payments do not necessarily mean lower overall costs. A lease may be attractive for someone who changes vehicles frequently, while a car loan may offer better long-term value for someone who keeps the same vehicle for many years.
Is It Cheaper to Lease or Finance a Car?
Leasing usually means lower monthly payments because you are not paying off the full cost of the car like you are with financing. However, with financing, you have the added benefit that once you pay off the loan, you own the car, whereas with leasing, you don’t have that added benefit, and instead have to make another financial commitment when your lease is up if you want to continue driving a financed car.
Financing has higher monthly payments, but at least with financing, you are paying off the cost of the car, whereas leasing doesn’t afford you that benefit, but rather only allows you to drive a car for a certain period of time for a monthly cost. If you’re thinking about leasing a car for 3 years for $350 a month, you’re paying about $12,600 in that time period, plus other costs up front. If you take out a loan for the same car, you’re looking at about a 60-month loan for $500 a month, and a total cost of $30,000. Just to be clear, the loan is for the purchase of the car; the lease is just for the temporary use of the car.
To get a fairer comparison, you also have to take into consideration costs of insurance and maintenance. You also have to take into account the residual value of the leased car, and how much the car is worth once the loan is completely paid off.
Pros and Cons of Leasing a Car
Leasing offers the opportunity to drive a new or new-to-you vehicle without the long-term commitment of an auto loan. Monthly payments are lower with a lease, particularly if you want to drive a vehicle that costs more than what you can afford with a loan. Some people find the scheduled change in vehicle at the end of a lease term to be advantageous.
There are drawbacks to leasing. Most lessees are limited by how far they can drive during a lease term. Exceeding the limit can be costly. Likewise, excessive use can result in extra costs. Leases do not build ownership equity, and lessees do not decide how a vehicle is modified.
I would only consider leasing if I wished to have a new vehicle every few years. I would also have to accept a more indirect control over my vehicle. One must also take into account one’s use of a vehicle. Those who drive long distances would probably find the restrictions of a leased vehicle to be onerous.
Pros and Cons of Financing a Car
Drivers like the security of knowing they can own a vehicle and keep it as long as they want. With each payment, the amount owed is reduced. Ultimately, the loan is paid off, and the driver isn’t required to make any more payments. Owning the vehicle provides more options. For example, the owner can sell or modify the vehicle. While the vehicle is owned but financing is still owed, the lender can restrict the owner from selling or modifying the vehicle.
The driver must consider how long the vehicle is financed. A long financing term can keep the monthly payment low, but the total amount of interest paid increases. The driver also must pay for vehicle maintenance and repairs, and the vehicle can lose value.
A good aspect of financing is the value after the final payment. If the vehicle is financed for a long term, the vehicle is likely still usable, and the owner isn’t required to make a payment. If the vehicle requires repairs and maintenance, money saved from not making a payment can go toward repairs and maintenance.
Lease vs Finance: What Happens at the End of the Agreement?
The final phase of an agreement is where things start to differ quite a bit. With leases, you’ll give the car back to the leasing company. If your contract permits, you may be able to purchase the car for the pre-purchased price or a price determined by the contract. You’ll probably want to take care of any items that you’re responsible for, such as excess mileage, damages, or charges, prior to returning the car.
With loans, the car will be yours to keep once the loan is completely repaid. Until that occurs, the lending company has first right of possession to the car, meaning that you can’t sell or trade it. Once the loan is completely repaid, you can sell or trade the car at any time.
When looking at leasing vs. financing, this is always an important consideration. With a lease, you’ll have to find another car to lease at the end of the term. With financing, you’ll have complete ownership of the car. With the ownership of a car that’s a number of years old, you’ll probably have to pay for repairs and maintenance.
Should You Lease or Finance Based on Your Driving Habits?
For some people, leasing is the better option, like if you have a short commute and a nice rotation with your cars, say every couple of years. The good thing about leases is you can set a mileage limit; however, you have to guess how many miles you’ll really drive. Otherwise, it becomes a nasty surprise.
Leading an active lifestyle with lots of road trips or frequent visits to relatives out of town may suggest buying the car is better, as traditional loans don’t set mileage limits the way leases do.
An important factor to consider may be your lifestyle and how predictable it is. Someone who works from home may not drive much; however, a person who commutes to work a long distance may drive too much and break a lease.
You should take into account how many miles you think you’ll drive in a year and how long you actually want to keep the car. Think about unexpected costs of owning the car, like repairs, and how good the deal really is. Is a low monthly payment really worth it if you end up leasing a car you don’t really want?
When Is Leasing Better Than Financing?
One advantage of leasing is having the ability to replace your car more frequently with a newer model. Traditionally, leasing also means having lower monthly payments. From a tax perspective, leasing offers an advantage over purchasing if the business can write off the lease payments.
Another example is an individual who uses a vehicle for business. That individual may prefer leasing to owning because of the ability to write off the lease payments. Additionally, if the individual does not want the vehicle after three years, the lease can be transferred to a new individual.
That being said, I look at the lease terms, conditions, fees, and payments the same way I look at the loan terms, conditions, fees and payments. You may lose some of the advantages of leasing if you enter into numerous lease agreements.
In general, it is better to look at the entire contract rather than assuming that a lower payment means a better contract.
When Is Financing Better Than Leasing?
Financing can give you more flexibility if you want to avoid leasing and have a vehicle that is fully owned at the end of payments. It can also be a good option if you want to use the same vehicle for several years after the loan is paid off.
Imagine if a driver chooses to buy a reliable sedan every few years with a loan every time. Once the loan is paid off, that driver won’t have to make a monthly payment again until they decide to replace the sedan. However, there are costs associated with owning the sedan (maintenance and repairs). Not having a loan payment gives the driver more money for a longer time, compared to if they were making a loan payment.
Financing a vehicle doesn’t always work out. There are many uncertainties and risks associated, including the rate at which a vehicle loses value. I would want to finance a vehicle, instead of always leasing, as long as it’s within my budget, so I can own the vehicle for a long time.
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Lease vs Finance: How to Choose the Right Option for Your Budget
Take into account your total financial situation when making this decision. Don’t make your decision based on the advertisement’s claims. Consider the down payment, monthly payment, interest, charges, insurance, maintenance, and the car’s expected resale value. Consider the total cost over the time period to give yourself an accurate estimate of the cost.
Think about your plans. Do you see yourself with this car for 8 years? Would you be happy to have a new car every few years? Are you someone who drives a lot? Would you have the means to pay a larger monthly payment? Would you feel uncomfortable not having an emergency fund?
Don’t pick the car just because it’s pretty when you see it. Take time to look over the contracts and compare contracts between dealers to get the best deal for you. It’s alright to be excited about a new car, but you don’t want to go too far and not be able to afford necessary things, just to get a new car.
Frequently Asked Questions
Lease or Buy?
It’s a case-by-case scenario. Leasing can work for someone who wants to drive a newer model and doesn’t mind making payments every month. For people who want to keep their car after making payments for a long time, buying can work better. Figure out which has the lower overall cost.
Is leasing less than financing?
Monthly payments are typically less when you lease, but the overall cost of leasing can be greater than financing. Up-front costs and leasing fees must be factored in, in addition to what you’ll pay for insurance, maintenance, and what you’ll do once the lease is up. Financing can be more cost-efficient in the long term if you keep the car once it’s fully paid off.
Do you own the car after making the payments?
Yes, after you pay off the loan, you own the car and are free to do with it as you please.
Can you buy the car after leasing it?
It’s likely. Lease agreements typically allow for the purchase of the leased car at the end of the lease term. Lease agreements vary and can include restrictions and fees on the purchase of the leased car.
Does leasing or financing affect credit?
Applying for a lease or loan may impact your credit, and how long you’ve had credit can impact your score. Paying on time can help your credit score, and paying too much can hurt it, so only take on what you can afford.
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