When you can’t pay for a vehicle outright – as most people can’t unless they select a used and older model – your options are leasing and financing. Both have advantages and disadvantages, depending on your needs. While there are similarities between them, like regular monthly payments, they also differ in significant ways.
What is the Difference Between Leasing and Financing?
Financing a vehicle means paying off a loan for the total cost of the vehicle plus interest while leasing means that you are essentially renting the use of the vehicle. Financing spreads the cost out over an agreed-upon period, and every payment goes towards eventual ownership. Leasing terms are usually shorter, and the payments are usually smaller, but, in the end, you return the vehicle to the dealership.
The Pros and Cons of Financing a Vehicle
Financing allows you to purchase a vehicle that you would not be able to buy out-of-pocket. Then, when the payments end, you retain full ownership. Since most vehicles are operable well past the financing term, you can continue using it for many payment-free years. There are no restrictions on how often you use the vehicle or how you choose to modify it. Once you own it, you can also choose to sell it.
A major drawback of financing is that, after the warranty expires, you have to shoulder any repair costs. Routine maintenance will keep a vehicle in good shape for much longer, but it will become more difficult to maintain the older it gets. Another factor to watch out for is the length of the financing term. If the term is too long, you may end up in a situation where the vehicle is worth less than the amount you still owe on it.
The Pros and Cons of Leasing a Vehicle
The main reason that people choose to lease a vehicle is that the lower monthly payments allow them to afford a newer model. Because lease terms are shorter, the vehicle remains under warranty the entire time, protecting you from major repair costs. Newer models will also have more advanced safety systems. When the lease term is up, you can trade the vehicle in for another one.
Leasing agreements, however, usually come with mileage limits, and you will have to pay extra for any kilometres over your allotted amount. You may also have to pay an additional fee if you return the vehicle with damage above what might be considered regular wear and tear. If you choose to lease a newer model, you will likely have to pay a higher insurance rate as well.
Deciding on the Right Option for You
The best route to pay for a vehicle will depend on what you want and need as a driver. If you are comfortable with lease limitations and you want to drive a nicer vehicle for a smaller monthly payment without having to worry about unexpected repair costs, then leasing will be a great choice. However, if you would prefer your monthly payments go towards eventual ownership and you want more freedom to use your vehicle as you see fit, then financing is the better way to go.
By carefully weighing the pros and cons of leasing and financing, you should be able to come to the right choice. Either one can be a good option for getting a quality vehicle that you can rely on at a price you can afford.