Leasing vs Buying: Everything You Need to Know

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Leasing vs financing

As a former sales rep at Volvo and Subaru, I’ve witnessed my fair share of poor vehicle purchasing decisions that included buying a car that’s way over budget or trading in a vehicle purchased less than a year ago.

I’ve also seen buyers lease a vehicle they couldn’t really afford to buy or buy a vehicle that would have really been better off leasing. The final decision often comes down to immediate financial considerations when in fact you need to look at both your needs and the long-term financial results of each option.

In the end, finding the best option between leasing and buying a new vehicle requires a careful analysis of what you plan on doing with your new car, how long you plan on keeping it, and of course your budget. But because most buyers don’t have time to carefully analyze any of those factors, I’m going to try and break things down for you.


Difference between leasing and financing a new vehicle

First off, let’s take a second to look at the differences between both options. If you already know them, skip to the next section.

Leasing a vehicle is kind of like renting an apartment in the sense that you pay monthly to use something that doesn’t belong to you. The difference is that you generally lease a car for a period of 24 to 60 months while an apartment is rented on a yearly basis.

When you lease a new car, you are effectively paying a portion of that vehicle over the time period specified in the contract. The balance left is called the residual value. So, if you lease a car with a 48 % residual value over 4 years that’s worth 30 000 $, you will be paying $ 14,400 over 48 months plus interest.

At the end of the contract, you can decide to buy the vehicle back at the residual value plus taxes, or you can give the car back to the dealership and get a brand-new car.

When you are financing or buying the $30,000 car, you are simply dividing the cost of the car plus the interest by the term of the contract (anywhere from 12 to 84 months). The car is yours from the start granted you can pay off the loan. Once the contract is up, you own the car outright.

In short, when you lease, you are paying for a portion of the value of the car. When you finance, you are paying all of it. That’s why lease terms tend to be shorter and more affordable.

We get into a few detailed examples below, but here is a simple and quick glance at the pros and cons of each option.


Leasing Pros

1. Your vehicle will most certainly be always covered under warranty while you are leasing it.

2. Lower monthly payment which means you can drive a more luxurious, or better-equipped vehicle.

3. You don’t have to worry about depreciation.

4. There are fiscal advantages is most provinces or states to leasing if you use your vehicle for work or you are a business owner.

5. If you don’t like your vehicle or want a new model, you simply give it back to the dealer at the end of the lease.

Leasing Cons

1. If you keep giving back the vehicle, you never actually own an asset and are always paying for a vehicle.

2. Leasing and then buying back the vehicle at the end is usually less financially advantageous than buying it at the beginning.

3. You have a limited number of kilometers you can drive over the period of the lease. It usually varies from 16,000 to 24,000 kilometers per year. You will have to pay for every additional kilometer over the limit. The costs can add up.

4. Very difficult to get out of a lease contract and there are usually penalties.

5. You may have to pay for excess wear-and-tear at the end of the lease. This includes spills in the back seat and parking lot dings and dents that you would maybe live with if you owned the car.

Financing Pros

1. You will ultimately own the vehicle and are paying monthly for something that is yours.

2. You don’t have to worry about how many kilometers you drive yearly.

3. You don’t have to worry about fixing dings and dents or spills inside the vehicle at the end of the contract. You can do it when your budget allows it.

4. You can modify the vehicle as you see fit.

Financing Cons

1. For business owners and people who use their vehicle for work, financing is usually less appealing fiscally than leasing.

2. Higher monthly payment.

3. Longer contract which means you may still owe money on a vehicle that is no longer covered by the manufacturer’s warranty.

4. You have to keep your vehicle longer for it to make sense. If you don’t like your vehicle, you are basically stuck with it or lose a lot to depreciation.

5. With that in mind, here are some things to consider when hesitating between leasing and financing.


Some considerations about leasing vs financing a new vehicle

How long do you plan on keeping your vehicle?

What is the residual value of the lease?

What is the interest rate associated with each option?

By knowing this, you can calculate the total cost of each alternative. Comparing that total cost will help you make your final decision. Let’s look a simple example using the data we talked about earlier.

Total cost of the car with taxes: $30,000
Lease terms: 48 % residual, 3.9 % interest, 36 months
Financing terms: 3.9 % interest, 60 months
Tax rate: 14.975 %
Trade-in value: 0 $
Down payment: 0 $


Let’s have a look at a few examples using the calculator at the end of this article. There are a lot of various components that go into the total cost including taxes added to the residual value if you buy the vehicle back as you would in this example.

Leasing vs financing example 1

You plan on keeping the vehicle for six years. That means that you will purchase the leased vehicle back at the end of the contract. We have not however factored any costs associated with financing that residual value. We assume you pay cash for the vehicle at the end of the lease.

Leasing

Cost per month: $505.48
Cost of lease over 36 months: $18,197.28
Cost to purchase vehicle: $16,556.4
Estimated value of vehicle after six years: $7,500

Total cost of leasing: $27,253.68

Financing

Cost per month: $548.75
Cost of financing over 60 months: $32,925
Estimated value of vehicle after six years: $7,500

Total cost of financing: $25,425

In this case, financing is the best option. As a matter of fact, it’s usually assumed that if you plan on buying back the vehicle after the lease from the start, you are better off financing immediately.

Leasing vs financing example 2

Imagine that you plan on keeping the vehicle for only three years. In that period, depreciation will be higher which means the vehicle will have already lost a significant portion of its value.

Leasing

Cost per month: $505.48
Cost of lease over 36 months: $18,197.28
Cost to purchase vehicle: $16,556.4
Estimated value of vehicle after three years: $15,000

Total cost of leasing: $ 18,197.28

Financing

Cost per month: $548.75
Cost of financing over 36 months: $19,755
Estimated value of vehicle after three years: $14,400
Loan balance after three years: $12,704.98

Total cost of financing if you sell the vehicle for $14,400 = $18,059

Financing still works better in this case. However, if you financed car has been in an accident, or its depreciation is accelerated by various market factors, the lease becomes the better option as you can simply give it back and call it a day.

Moreover, if you play with the interest rates and give the lease a lower interest rate, then it quickly becomes more advantageous. If the interest rate is lower when you finance, then that becomes the better option.

In the end, it all boils down to your needs. Take the time to make a few calculations and the best solution will quickly become evident.


Lease vs buying calculator

Note: To calculate cost of financing, put the residual value at $0


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