
Many people find a car to love and it can seem effortless to find that car because unknowingly people become emotionally attached to a vehicle. Once you find that car, it almost becomes a mental sense of satisfaction as you found the perfect car! Okay, excellent you have found the car within your budget and the car you want to spend your driving adventures with but, how will you purchase this car? Should you lease or finance your car?
There is really no real answer to which method of purchase is better, as there are many factors that would determine if leasing or financing is right for you. You need to ask yourself some of these questions before deciding to lease or finance.
Do you like to change your vehicle often?
Do you drive more than 24,000 Km/year on average?
Do you plan to keep your car for longer than 4 years?
What would you be using your vehicle for or what do you plan to use it for?
Do you view your car as an asset or a depreciating expense?
Do you work for a business where there are certain vehicle requirements?
You need to ask yourself some of these questions to determine which method of payment would benefit the most from. If you drive more than 24,000km/year on average and plan to do some off roading with your vehicle, leasing probably isn’t the best idea and financing may be better for you. If you like to switch up your vehicle often, see it as a depreciating asset, drive close to 24,000km/year on average then leasing may be more suitable for your lifestyle. Let’s go over some pro’s and con’s of leasing and financing.
Leasing
Pro’s:
- Lease payments are typically lower than a finance payment
- You can switch your car every 2-4 years
- You don’t need to worry about selling your vehicle
- You have manufacture warranty for the duration of your lease term
- Repair costs are virtually zero
- Never have negative equity in a vehicle
- Have many options with a lease- walk away from the vehicle after the lease, get a new vehicle, get out early and transfer your lease….
Cons:
- You don’t own your car (Unless you buy it out at the end of the lease term)
- Always have a car payment
- Limited to the customization of your vehicle
- Limited to the amount you drive
Financing
Pro’s:
- Own your vehicle at the end of your finance term
- Customize your vehicle how you want
- No restricting guidelines on your vehicle
- Can pay off your vehicle as quick as you like with an open loan
Con’s
- Payments are higher
- Payment term is usually longer
- You own a depreciating asset
- Need to pay for repairs after manufacture warranty is expired
- Need to sell or dispose of vehicle after usage
Let’s take a look at a basic example to get a better idea of a lease or finance
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Leasing
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Financing
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Cost: $25,000
Term: 48 Months
Payment: $392.50
$392.50
X 48 months
$18,840.00
$13,000.00- Option to buy
$31,840.00- Total cost to buy out lease
*Lease costs you $1,977.76 more over entire term and $494.44 more/year.
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Cost: $25,000
Term: 48 Months
Payment: $622.13
$622.13
X 48 months
$ 29,862.24 – Total cost to own vehicle
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We found that a lease will cost you more money in the long run if you decide to buy your vehicle after your lease term. On the upside, a lease will actually allow you to have more free cash flow than finance. This is how…
Monthly cash flow from lease: $622.13 – $392.50= $229.63/month
Yearly cash flow: $229.63 X 12 months= $2,755.56/year
Term cash flow: $2,755.56 X 4 = $11.022.24 for term
You have an additional $2,755.56 per year of cash flow by choosing to lease your vehicle.
Extra cash flow from your lease could be used for other things such as…
- Pay down your mortgage
- Plan a vacation
- Buy an RRSP
- Pay off credit cards
- Start a savings account
- Pay for education
- Stock and bond investment
Over all the decision of leasing and financing is up to you. I do encourage being open minded about purchasing your next vehicle if it’s either a lease or finance. Sometimes leasing and financing is determined by the most desirable interest rate or incentive the dealer may have at that time. I recommended having your sales rep sit down with you and go over your payment options for a lease and finance to determine which would be the best method of attaining your next vehicle. Always ask questions as this is why your sales rep is present. The sales rep isn’t there to sell you a vehicle that is not within your means. A sales rep is present to help guide you through the buying process and help advise you to make the right buying decision.
If anyone has any further questions about leasing or financing please feel free to make a comment and we will get back to you with the best of our knowledge.
