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To Lease or Buy? That is the Question

Purchasing a new car can be intimidating and confusing whether you’re a first-time buyer or already own a vehicle. Consumers are tasked with deciding on a number of options – from significant choices such as vehicle body type and engine size to small details like paint finish or floor mats. As if choosing a car wasn’t complicated enough, there are also options on how to pay for the vehicle – you can either finance, lease or pay cash outright to avoid paying interest.

Buying vs Leasing

Buy

Cars can be purchased in two ways. The simplest option, and usually considered the most financially prudent, is to pay for it in full at the time of purchase. However, many people aren’t in a position to pay cash for such a large purchase up front and instead choose to finance the vehicle by borrowing the necessary funds from a lender (bank, credit union or the car dealership) and pay the loan back in monthly installments, with interest. Once the loan is paid in full, the vehicle is theirs.

Lease

The key difference between leasing a vehicle versus buying it is that a lessee (someone who leases a vehicle) doesn’t actually own the vehicle. Instead, they “rent” it for a long term (usually between three to five years) rather than by the day or hour. At the end of the lease term, the vehicle must be returned to its rightful owner – the dealership. Similar to financing, a lessee makes monthly payments to the dealer, but because they are “renting” rather than purchasing, they only pay for the depreciation value of the vehicle, plus interest. At the end of the term when the vehicle is returned, the lessee can choose to buy it out by paying for its remaining value or enter into another lease.

The Pros and Cons of Leasing vs. Buying

Pros of Leasing

One of the main advantages of leasing a vehicle versus financing it for purchase is that the monthly payments are often lower. Lease payments are calculated based on a vehicle’s depreciated value over the lease term. For example, if a car is leased for four years and is worth only 40% of its original value by the end of the four years, then the payments are based only on the 60% that is utilized during the four-year lease and not the entire value of the vehicle. You also do not have to worry about the trade-in at the end of the lease; you simply return the vehicle. Car owners also enjoy the freedom that leases offer to switch cars more frequently. At the end of a lease term, they can easily enter into a lease agreement for another, newer car rather than staying with the same car for several years. Finally, dealerships sometimes pay annual maintenance and repair costs for a leased vehicle, although this depends on the agreement.

Cons of Leasing

While a lessee will benefit from lower monthly payments in the short term, a lease is usually the more expensive option in the long-term than buying a new vehicle. A vehicle’s loan payments will eventually end when the car has been fully paid for; for example, if you purchase a car that has a lifetime of 12 years and finance it over five years, you can continue to drive the same car for seven years payment-free. A lease, on the other hand, would require you to make payments for as long as the car is in your possession, however long it may be. Leased vehicles typically also have a usage limit on the vehicle (ranging from 12,000 to 25,000 km/year) – going over that limit would result in additional charges, which could be a deal-breaker for some consumers.

On top of this, though the basic coverage would be the same between leased and financed cars – with no difference in premiums – some insurance companies ask for higher limits, which would cause a difference in premium. In Quebec, the premium may be slightly more for a leased car vs. a financed car – in order to mitigate the risk of leasing a car.

Pros of Buying

The most obvious advantage of buying is that the car buyer actually owns the vehicle, granting them the freedom to do with it as they wish; whether it be driving it as much and as often as they want, personalizing it, or even simply selling it. Additionally, if an owner decides to finance their vehicle, they will see the added benefit of building up their credit (as long as they make their regular payments on time). Finance terms are also usually much longer than lease terms (up to 96 months), allowing car buyers to minimize the amount they have to pay each month. Many automakers, such as Kia, Hyundai, Volkswagen and Chevrolet have different financing offers throughout the year, occasionally offering 0% financing options.

Cons of Buying

Buying either with cash or through financing represents a huge financial commitment to the car buyer. After all, aside from one’s home, a vehicle is most likely the single largest purchase one is likely to make. Financing leads to possibly expensive monthly payments if spread over shorter terms, or higher interest rate if spread over longer terms. Furthermore, a cash-down transaction requires a significant investment up front and can be financially shocking.

Choose the option that’s right for you

Buying and leasing your vehicle both have their advantages and disadvantages and these need to be weighed against your requirements. If you intend on only using the vehicle for a limited time, leasing provides a clear advantage. However, if you view the purchase as an investment or if you are an individual who drives a lot (such as a sales professional or Uber driver), then buying the vehicle may be the better option so as to avoid fees incurred from exceeding a lease’s kilometer limit. Perhaps, most importantly, you must consider your financial situation when purchasing a new vehicle.

Regardless of which payment method you settle on, you should always do your research to ensure you get the best price on your new vehicle. A tool like Unhaggle’s free Dealer Cost Report can help arm you with the knowledge you need to level the playing field before you talk to a dealer. Knowing that you’re getting the best possible price will make this intimidating and confusing car buying and leasing process that much easier.