Leasing vs. Buying a Car: What's Right for You?

 

Before I bought my first vehicle, I had no idea how many options there were. My whole life I assumed I had to save up for years and pay for it in-full before I drove off the lot. When I first started in the automotive industry, it was a shock to realize that not only could you purchase a vehicle and make payments on it - but there were actually a few different options available based on what each unique person needs. The the two most common purchase options that we use at Crosstown are leasing and financing. How do you know which is going to be best for you? Below I’ll outline some of the key differences (and similarities) between leasing & financing to help you make an informed decision when it’s time to purchase your next vehicle. To really know which is going to be best for your unique vehicle purchase, get in touch with one of our Sales Specialists to get the conversation started.

Let’s start with the basics. What does it mean to lease or finance a vehicle?

Who doesn’t love a good food analogy? If you think about the entire vehicle purchase price being a whole pie. Financing would be like cutting the pie into equal slices, where each slice is a payment. Leasing on the other-hand, is like cutting out a portion of the pie to save for another day...and then cutting the remainder of the pie into equal slices.

I’ll elaborate…

Most of our customers at Crosstown choose to finance their vehicle rather than lease. Simply put, financing gives you the option to make payments on the entire amount of the purchase price. These payments are split into equal monthly, bi-weekly, or even weekly amounts based on a term that ranges anywhere from 24 to 96 months. You also need to take into consideration the interest rate that is set by the lender. Based on your personal credit profile (and a variety of other factors), these rates can be anywhere from 0% up to 20%+. Why is financing the most commonly chosen purchase option? It’s a lot easier to explain & there are fewer moving parts that affect the final monthly payment amount. Fear not - by the time you’re done here, you’ll be able to understand which option is best for you!

Like I said above, there are many moving parts that affect the final monthly lease payments on a vehicle. A lease payment is calculated by looking at the expected residual amount of the vehicle at the end of the lease term. The residual amount is the expected value of the vehicle when the lease term ends, this is typically a percentage of the MSRP that is set by the manufacturer. These percentages change each and every month.  The residual value is the piece of the pie we’re setting aside for later. So now how does the rest of the pie get split up? Just like with financing, you first have to choose the term of your lease which typically is between 24-60 months. Next, you need to know how many kilometers you drive (on average) per year. Now this is where things can get confusing….depending on the term you choose and the annual kilometers you choose, the residual value can increase or decrease. On a very basic level the rule of thumb is this - Short term, low kilometer allowance? Higher residual value & lower payments. Longest term, high kilometer allowance? Lower residual value & higher payments.

 

Now that you have a basic understanding how each option works. How do you know which is going to be best for you?

Will you be buying new or pre-owned?

This is an easy one. If you’re buying a pre-owned vehicle, financing is going to be the only available option with Crosstown. On a pre-owned vehicle purchase, the term & interest rate will be based not only on your credit profile, but also on the vehicle’s age & kilometers. The older the vehicle & higher the kilometers, typically means that the term will be shorter.

When purchasing a new vehicle, you have the option to choose between leasing & financing. In the following sections, I’ll be comparing the two and assuming the purchase is on a new vehicle.

How will you use your vehicle?

I bet you didn’t think that how you buy your vehicle would be impacted by how you use your vehicle? In many cases - it really won’t make a difference...but if either of the examples below appeal to you, leasing might be a great option to consider!

If you have the option to write-off your vehicle use on your taxes, leasing is a great option to consider. Recording & calculating what gets written off is significantly easier on a leased vehicle vs a financed vehicle. Your accountant will thank you when tax-time comes around!

Driving less than 20,000 kilometers on average per year makes you a “low kilometer” driver. You may want to consider leasing if you fall into this category! You’ll be able to take advantage of lower possible payments than if you were a “high kilometer” driver. Beware! If you exceed your kilometer allowance over the term of your lease, you will likely be responsible for excess kilometer charges.

How often do you get a new vehicle?

If you’re known as “the one who always has a new car”- or you want to be that person. Leasing was made for you! As lease periods are shorter than the average finance term, leasing gives you the freedom to upgrade to a new vehicle more frequently and without any pesky loan carryover (aka negative equity).

With the average finance term around 84 months (7 years), trading in before the end of your loan is quite common in our area. However it can result in owing more on your loan than your vehicle has been appraised at. This difference between loan and vehicle value can be carried over to your new loan and included in the monthly payments moving forward. Financing is a great option for those who tend to keep their vehicles over a longer period of time or are comfortable with the scenario mentioned above.

Know where you stand financially.

This is important to know regardless of whether you are leasing or financing. The stronger your credit, the less of a risk the lenders feel they are taking and the more likely you are to qualify for the lowest rates. Leasing is typically an option reserved for above average profiles with strong repayment history. If you’re not sure where you stand, our team of specialists are more than happy to help! Find our easy online pre-approval form here.

Let’s be perfectly honest - there are so many things that I could tell you about leasing and financing and I’ve only just barely scratched the surface. I hope that the information above has given you a better idea of whether leasing or financing your next vehicle is the better option for you. Have more questions or want to pick out your next vehicle? Give us a call today at 780-488-4881 or browse our inventory online!


Categories: Finance