Should I finance or lease a car?

So, you’re looking for a new car. You think about all the specs of the car: the exterior, the engine, the interior, the gas mileage, trunk space, the audio system. After shopping around at plenty of dealerships and taking multiple test drives, you finally decide on the one.

Now it comes time to look at the numbers, and this where things can get really confusing, really fast. You could lease the car, finance it, or buy it out right. Which one is the way to go? Which will give you the best value for your money?

Let’s take a look at the ways of paying for a car. Generally, there are 3 when you decide to get a car from the dealership:

1. Financing the car
2. Leasing the car
3. Cash up front

Each method comes with it’s on pros and cons. A comparison between them which will help you decide which method works the best for you.

Financing

Financing means that you’re buying the car by taking a loan from a lender. You then make monthly payments to the lender to pay off the car. Many times, the car dealerships themselves will have access to the manufacturer’s financing company. Ex. Toyota dealerships will help you get financing from Toyota finance, Ford will help you get financing from Ford Finance. If you want, you can even secure a car loan from a bank of your choosing.

After you finish your payments, you will own the vehicle. It’s all yours! Owning the vehicle is the obvious benefit, but the monthly payments throughout these years will generally be higher, not to mention you’ll be paying it off for up to 7 or 8 years.

Leasing

Leasing the car essentially means that you’re renting it, or as some call it, “paying for the depreciation”. At the end of the lease, you won’t actually own the car. The benefit is that your monthly payments will be lower, and the term of your lease will likely be short than the term of your finance.

Now, although you won’t own the car at the end of the lease, you’ll have the option to own the car by paying for the “residual value” which is the calculated value of the car at the end of the lease, based on the natural depreciation of an older vehicle, which includes the regular wear and tear and kilometers driven.

Cash

Finally, the third and most obvious option is buying the car outright with cash. This is pretty straight forward and doesn’t need more explanation. If you have the cash to spend, then you’ll be able to buy the car outright, without paying any interest for the financing!

These are the basics behind getting a vehicle. Of course, there are plenty of other factors to consider. For example, do you want to own the car? Or do you want to drive a new car every few years? Keep in mind, that as cars get older the cost of maintenance also goes up. You’ll also need to be to be wary of the interest rate in addition the length of the finance or lease. Sometimes, a lower interest rate doesn’t necessarily mean you get a better deal because the term will drag on for longer than usual.

To summarize, if you want to own a car, paying cash up front will be the cheapest option. If you don’t have the cash, then financing will be the way to go, assuming you want to own the vehicle. If you prefer to drive a new vehicle every few years, then leasing is the obvious choice, unless you want to put up with the hassle of selling your vehicles privately.