The Guide to Leasing vs Buying
You’ve made the decision: it’s time to get a new car. Now you’ve got to decide on how to pay for it. You can either pay for the car in full, finance it, or lease it. Let’s assume that you don’t have a pile of cash set aside for that first option. This narrows your choices down to two: leasing and financing.
But how do you decide which is the right choice for you? And what about all that financial lingo dealers throw around, what does it all mean?
How Does Financing Work?
When you think of financing, just think of loans. By financing, you’re essentially spreading out the full asking price of the vehicle over a longer period of time. This is done by borrowing the money you need from a financial institution like a bank or credit union, commonly referred to as the lender.
If you’re financing a vehicle, you’ll be applying for credit. The total amount you will pay per month depends on multiple factors, including the price of the vehicle, the Annual Percentage Rate (APR), and the length of the loan terms (shorter loans typically have lower rates but higher monthly payments). Loan terms for vehicles are typically 36, 48, 60, or 72 months.
As you make monthly payments, the loan amount will drop to zero, and you will own the vehicle completely.
Terminology to Know
- DTI – Debt to Income
DTI determines your available income. It includes all outstanding debts, including rent/mortgage, monthly utility bills, credit card debt, and other loans you may have. DTI should be under 50%. - PTI – Payment to Income
PTI is the amount of the monthly vehicle payment compared to your monthly gross income. A reasonable PTI is around 15%. - LTV – Loan to Value
LTV is the amount financed compared to the vehicle’s worth. If you finance a car for $19,000 and the vehicle’s value is $20,000, you would have a 95% loan to value
Steps to Finance
Step 1
You apply for a loan for the vehicle, which an institution may or may not grant you based on your credit history.
Step 2
Once you get credit approval, you pay a down-payment toward the loan — usually at least 20% of the cost of the vehicle, but you can put down whatever you can reasonably afford. The bigger the down-payment you make, the less you’ll need to pay per month.
Step 3
After you make your payment and sign all the appropriate paperwork the car is yours! You’ll just have to make monthly payments to the lender until you’ve paid back the full amount you borrowed.
What if I have bad credit?
Don’t get discouraged! With so many factors going into financing a new vehicle you can still get an auto loan even with bad credit. Before you visit the dealership determine your financial situation and budget. Get a copy of your credit report so you know what to expect in terms of financing. Find a vehicle that fits in your budget and go to a reputable dealer.
Find the vehicle that fits your needs. Explore personalized options, plan your budget, and compare with ease – start calculating your car loan payments with our Auto Loan & Car Payment Calculator now!
How Does Leasing Work?
When you lease a vehicle, there are no loans involved. You establish lease terms based on how many months or miles you want to drive that vehicle (for example, 36 months or 36,000 miles at 12,000 miles per year). You make a down payment and pay a monthly fee, just as you would if you were financing. However, the down payment you make is lower when you lease, and your factory warranty covers the cost of typical maintenance issues that arise when you’re buying to own.
When your lease term is up, or you’ve reached your mileage cap, you must give the car back to the dealership and pay any excess depreciation or mileage fees (if any). The car also must look as close to what it did when you got it as possible, so accessories you added have to be removed, and permanent alteration or customization isn’t allowed. You may have the choice of buying the car at its residual value, but most people typically lease a different vehicle under a fresh term or buy a new or used vehicle.
Terminology to Know
- Capitalized Cost
The total cost of the vehicle that is used to calculate the lease payments. It includes the vehicle’s selling price, taxes, fees, and any additional costs. - Excess Mileage Fee
The fee charged if the lessee exceeds the agreed-upon mileage allowance. This fee is typically charged per mile. - Disposition Fee
A fee charged by the lessor at the end of the lease term to cover the costs associated with inspecting and selling the vehicle if the lessee chooses not to purchase it. - Gap Insurance
Optional insurance that covers the “gap” between the vehicle’s actual cash value and the amount owed on the lease if the vehicle is declared a total loss due to an accident or theft.
What Are You Going to Do With the Vehicle?
It’s also good to keep in mind what you want to do with your vehicle. If you’re planning on hauling boats and trailers around on the weekends or consistently heading off the beaten path, it may be unwise to lease your vehicle. If you damage or scuff up a leased vehicle through regular use, you’ll need to either get it fixed before you turn it in or pay excess depreciation fees when you return it to the dealership, all for a car you don’t own.
And if you plan to put in some serious mileage in your vehicle through long-distance business travel or frequent road trips, you could easily blow past your lease’s pre-established mileage limit. Then, at the end of the lease, you’ll have to pay for every mile you’ve driven beyond that limit, which at 10 to 25 cents per mile can add up quickly!
Where Do You See Yourself in Five Years?
If you’re living in a more suburban or rural town right now but expect to be moving to a crowded city in the next few years, you may decide that taking out a loan is not the right move financially. You’ll be locked into a longer-term payment plan, which may become a small burden. For example, you’ll have to regularly pay things like garage, permit and car insurance fees if you bring your vehicle into the city, all when it may be easier and more affordable overall to just use public transit. If you lease, you can drive the car that you need for the next 36 or 48 months and then cleanly return it before you move into the city.
On the other hand, if you see your living situation changing as you move away from the city or out of state, it may be wiser to finance. You won’t need to come back to return your car to the dealership you leased it from, and you’ll have a vehicle to drive for as many years as you need it. You can even sell your vehicle for some extra income, or give it to your children when they get their drivers’ licenses.
