Should you finance or lease your car? These choices can be confusing and Canadians must make this decision when it comes to how to secure a car. That’s why you should explore your options and know the differences between them. Each option has advantages and disadvantages; when you lease a car, you spend less money in the short term and typically drive the newest car models. When you buy a car, you incur more cost, but have ownership of a vehicle, which becomes an asset that can be resold. Financing a car can seem like a burden, but will offer more freedom and autonomy in the short and long term. In this article, we will explore the difference between car financing and leasing.
What is car financing?
Car financing is a loan used to purchase a vehicle. You can make a down payment, but it’s not required. Once you know the amount you want to finance with or without a down payment, you can secure financing from a lender. You can negotiate the terms with your lender; how long you will have the loan, how often you will make payments, and what the dollar amount payments will be. Once you complete all payments outlined in your financing agreement, you will fully own your vehicle. At this point, you can resell the car for cash or trade in your car for a newer model. This is the main difference from leasing. In a lease, you never own the car. You just have possession and use of it for an outlined period of time, as discussed next.
What is a car lease?
A car lease is considered to be a long term rental. With a lease, you are only making payments to the leaser while you have possession and use of the car. You would have a vehicle for an agreed upon period of time, after which you would return the car to the dealership or may have the option to purchase it outright. Payments for a lease cover the cost of depreciation for a car and are typically cheaper than financing payments which require you to repay the full value of a car. Essentially, the money is being spent on a rental when you lease a car.
The big difference: leasing vs financing
In one word, ownership. With a lease, you never own your car. Instead, you pay a dealership for the expected depreciation of the car while you use it. It’s like a long term rental that covers the cost of expected usage. At the end of your term, you return the car to the dealership. Whereas with financing a car, you will completely own the vehicle once you finish all your loan payments. In financing, you are repaying for the full cost of a vehicle, which makes payments higher.
Advantages & disadvantages of car financing
Overall, buying a car is about practicality. It is about your need for lasting, convenient and reliable transportation. When owning a car, it’s your responsibility to maintain it and most usually drive their cars to the ground. Financing is a great choice to get you a car for the long term. Let’s take a look at all the advantages and disadvantages of car financing.
If you have concerns about payment amounts with financing, a good option would be to place as big of a down payment as possible and stretch out your financing term. The downside of long financing terms are increased costs paid to interest. There is always a sweet spot that would serve your needs best. Use a car loan calculator to decide what would work best for you.
With more activity and consistent payments appearing on your credit report, you will work towards improving your credit score. Keep in mind that you must always make payments on time and in full for positive credit building. Financing diversifies the type of credits you have on your credit report, which plays a role in a good credit score too.
The big benefit to financing is when you pay off your loan. When this happens, you will have access and ownership to a vehicle without the need to make any more regular payments on it. You will have one less expense to worry about. You can also choose to sell the car, to buy a new model that will last longer and continue to be reliable.
When you finance your car, you own it. You can do anything you want to it, such as customize, alter, or drive as many kilometers as you wish. You do not answer to the dealership. With a lease, you typically cannot customize or alter a car. Leases also include maximum yearly kilometers, limiting your ability to travel across Canada or elsewhere, if you desire. With ownership, you can drive around without worrying about maintaining the car to the dealership’s standards.
Anything that happens to your car is your responsibility. If you have mechanical issues, outside of any warranty, you will have to pay the cost. Problems tend to occur later in a vehicle’s lifespan and can largely be avoided until extremely late, if you properly maintain your car. Oil changes, maintaining tires and breaks, and proper seasonal maintenance can go a long way. Even with preventative and diligent maintenance, you could get unlucky and come into a major problem that has big costs. This responsibility is something to consider, particularly financially.
When you own your car, you own an asset that depreciates quickly, especially when you purchase new instead of used. While different cars lose value at different rates, after 4 to 8 years, a car is bound to lose a lot of its value. Meaning, you may need to commit to driving an older car for the long haul. Buying a car is usually a commitment for many years.
Advantages & disadvantages to car leasing
The most appealing aspect of leasing is that you are getting a brand new car with premium options. Leased cars typically have the newest technology and latest design. Leasing is often the quickest and most affordable option to obtaining premium cars with top line features. Let’s check out other advantages and disadvantages to car leasing below.
Affordability comes from lower monthly payments, especially when compared to financing options. If having enough cash for a sizable down payment and the obligation of a high price tag deters you from financing, leasing may be right for you. Although, you can extend the term of a loan to decrease payments. This may not be an option you would consider because of higher interest costs and the potential for negative equity. Check out the current lowest rates available for new and used vehicles to weigh your options.
Leases have a lower overall commitment than financing. With terms of two to four years, a lease may be right for you if you are someone who moves around every couple of years and does not want to worry about transporting or selling a vehicle. They have clear start and end dates, with little hiccups in the middle. With a lease, you will likely never have to deal with breaking down cars. Most problems in cars occur later in their life span. A lease cycle of 2 to 4 years would likely keep you away from any serious car troubles.
With leasing your car, you will always be paying someone else to use a car. Payments will never end if you lease and you will not have an asset in exchange for all your money. This could be okay for some, but generally most prefer ownership and a light at the end of a tunnel, not just endless payments. If you require affordable payments, leasing may be your best option. If ownership and an end in sight for large auto payments is a goal you have, leasing would not be for you.
Leasing will limit how much you can travel. Standard leasing agreements allow for 24,000 KM of mileage per year. This means you are limited in how much, how often or how far you can drive with expensive overage costs. Sometimes you can secure a leasing agreement with less yearly mileage, these will generally be cheaper per month, but will be harder to avoid mileage overage costs. On the flip side, you can agree to and pay for extra mileage before you start your lease. Either way, leases limit how much you can travel and, if you drive a lot, it may be best to avoid a lease.
You must maintain a leased car to the leaser’s standards. While dealerships understand you will be driving and using your leased car, any excessive damage or changes to the car will cost you money. The expectation is that you will return the car in the same condition. Anything beyond normal wear and tear will be your financial obligation. If you are considering leasing, clarify with the dealership how they expect the car to be returned and maintain the car to that standard.
Which is best for you?
A car is a big financial obligation which involves a lot of consideration. Overall and monthly cost will probably be the biggest factor to delve into. The next factor you will likely consider is if you want the best, newest car and how often you want to upgrade. For a lot of people, the new and premium models are only attainable and affordable by leasing. Leasing has its drawbacks and ultimately leaves you giving money to someone else for a long-term rental. As we saw above, financing and leasing have their pros and cons. The option you choose depends on your unique needs.
Consider your overall budget, financial goals and lifestyle before selecting leasing or financing. To aid your decision, check out a car loan calculator and assess the lowest interest rates available on the market. When you’re ready to apply for financing, fill out our short application form and get approved for a car loan today!
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