Difference Between Leasing and Financing a Car: Which Is Smarter for Your Lifestyle?

Getting a new car is really exciting, but figuring out how to pay for it can be a huge headache. If you don’t have the cash to buy the car outright, you have two main options– leasing or financing. When you’re learning about them for the first time, it can feel like you’re reading a foreign language. 

At the root of the discussion is ownership of the car. If you finance, you are buying it. If you lease, you’re essentially renting it for a given amount of time. Whether you lease or finance your new car changes everything from your monthly bill to how flexible you are later on.The best option for you is going to be a very personal decision. What works for your lifestyle will depend on how much you drive, your money goals, and what you really want from your car.

What is Car Leasing?

A car lease is like a long-term rental agreement. Instead of getting a car loan to purchase the car outright, you are simply paying for the right to use it for a fixed lease period. This is typically two to four years.

Affordable and Convenient

This approach is all about affordability and convenience. Because you are only paying for the value the car loses during your lease term, your monthly payments are almost always dramatically lower than if you were to buy the same car. This makes it possible to drive a brand-new car with the latest technology and safety features every few years without a massive financial commitment.

Peace of Mind With a Warranty

The real beauty of a lease is the peace of mind it provides. Since the leased vehicle is new, it is almost always covered by the factory warranty. So you will not have to worry about unexpected and expensive repair bills. 

At the end of the lease term, you just return the car to the dealership and walk away. If you have truly loved the vehicle and want to keep it, you also have the option to buy it for a predetermined price called the residual value.

The Trade-Offs

There are some crucial trade-offs you’ll want to know about before leasing a car. The most significant one is that you never actually own the vehicle. Your lease payments are not building any equity. So when the lease term is up, you do not have a car you can sell or trade in. 

Most leases also come with a strict mileage limit, so if you drive a lot, you could end up paying excess mileage fees at the end. You also have to be extremely careful about wear and tear. Things like dents or scratches that a leasing company deems “excessive” can lead to additional fees.

Breaking Down the Lease Process

Getting a car lease is a straightforward process. It all starts with setting the terms of your lease contract with the dealership. This includes the length of the lease period, your yearly mileage limit, and your total lease payments. They will also determine the residual value. This is an estimate of what the vehicle will be worth at the end of the lease.

How Your Lease Payment is Calculated

Your car payment is calculated based on two key numbers. The first is how much the car is expected to depreciate over the course of the lease term. The second is the financing charge known as the money factor. This is very similar to an interest rate on a car loan. The combination of these two elements is what the leasing company uses to determine your final payment.

Upfront Cost of Leasing

At the beginning of your lease, you will pay some upfront costs. This can include the first month’s fee, a security deposit, and other fees like taxes and licensing costs. While you can make a down payment to lower your monthly lease payments, it is not required. You have the flexibility to pay the minimum upfront. This is a fantastic option for people who want to keep more money in their bank account.

What is Car Financing?

When you choose to finance a car, you are taking out a car loan to purchase the vehicle outright. A lender, which could be a bank, a credit union, or the dealership, gives you the money to buy the car, and you agree to pay them back with interest over a set period of time, known as the loan term. You will make loan payments every month until the car is completely yours.

Car Ownership

The most rewarding advantage of car buying is the feeling of true ownership. Once you make that final payment, the car is yours. Every payment you make on your auto loan helps you build equity in the vehicle. You have complete freedom to drive as many miles as you want, and you can customize your car with no restrictions. When you are ready for a new ride, you can sell your used car or trade it in for your next vehicle.

The Trade-Offs

The primary disadvantage of financing is that the monthly payments are generally higher than those of a lease. You’re paying for the full purchase price of the car, plus the interest rate on the loan. You will also likely be asked to make a significant down payment at the beginning of the car financing process. As the owner of the vehicle, you are also solely responsible for all maintenance and repairs after the factory warranty has expired.

Navigating the Car Financing Process

When you decide to finance your car, the dealership you purchased from will help walk you through the process. 

Get Pre-Approved

The car financing process starts with getting pre-approved for a car loan, which involves checking your credit score and income to see how much a lender is willing to give you. An excellent credit score can help you get a better interest rate, which can save you a substantial amount of money over the loan term. From there, you will finalize the loan with the lender and start making loan payments.

Decide on a Loan Term 

The loan term is the length of time you have to pay back the loan, and it is usually anywhere from three to seven years. A longer loan term will give you lower monthly payments, but you will pay more in interest over time. A shorter loan term will have higher monthly payments, but you will pay off the loan faster and save a significant amount of money in the long run.

Should You Lease or Finance a Car?

After looking at all the key differences, you’re probably not surprised that there’s no single right answer. The best option ultimately comes down to what you want out of your vehicle and your personal financial situation.

When You Should Lease

Leasing is often the smarter choice if you love driving a new vehicle every few years. You will have a lower monthly payment, and you won’t have to worry about long-term maintenance or a dramatic drop in resale value. The trade-off is the mileage restrictions and the fact that you won’t own the car at the end of the lease.

When You Should Finance

Financing is a perfect match if you want to be the sole owner of your vehicle. You get the freedom to drive as many miles as you want and customize your car. You’ll also build equity over time and have a valuable asset that you can sell or trade in for your next vehicle when you are ready. The downside is that you have a larger car payment and are responsible for all maintenance and repairs as the car ages.

Frequently Asked Questions

When you are looking at car leasing and car financing, there are always some common questions that come up. Here are the answers to a few of the most popular ones.

Is It Better to Lease or Finance a Car?

No one option is truly ‘better.’ Your best choice depends on your financial situation and how you live. If you want a new car with lower monthly payments, leasing is likely for you. If you want to own your car for a long time and change it up, financing is probably smarter. It is a personal choice. You just need to think about what is good and bad for each.

Do Dealerships Prefer You Lease or Buy?

A reputable dealership cares more about finding the best option for you than they do about whether you lease or finance. Both options are valuable to them. While some might push for a lease because of special incentives, a trustworthy team will present all the options to you and let you choose the one that’s right for you. They should be focused on building a long-term relationship with you as a customer, not just making a single sale.

What Is a Money Factor and Residual Value?

These terms are specific to leasing and are often misunderstood. The money factor is essentially the interest rate on a lease. It is a very small number that, when multiplied by 2,400, gives you an approximate annual interest rate. The residual value is the estimated worth of the vehicle at the end of the lease term. This value is set at the beginning of your lease agreement and is a major factor in determining your monthly payments.

Can You Finance a Used Car?

You can absolutely finance a used car, and it’s a fantastic option for people who want a lower monthly payment and want to own their vehicle outright. It is more difficult to find a lease on a used car, but some dealerships do offer them. When considering a used car, you’ll want to think about the resale value and any potential repair costs, as it may not be covered by a warranty.

Choose The Right Option For You At Riverton Chevy

Making a big financial decision can feel like a lot of pressure, especially when you don’t have a background in finance. The finance team at Riverton Chevy is here to help you find the perfect fit. Our team can also explain the intricate details of both leasing and financing so you have all of the information you need to make the best choice for your situation. Come to our dealership to take a test drive and talk to our money experts. We want to help you find the best deal possible on your new car.