Financing vs Leasing Your Next New Car

If you have the reserves to simply enter Cowboy Kia and write a check for the full amount of a new car, good for you! This article is not for you.

Everyone else basically has two ways to walk out with a new car. Financing the purchase is the usual way. Leasing is another option. The world of business is full of leasing: office space, office equipment, fleet vehicles, etc. People purchase things every day, but have likely never leased anything but an apartment. Is leasing a car a good alternative to purchasing? Let’s look at the pros and cons of both options.

Financing Basics

Financing a car involves determining what you have in cash that you can put for a down payment and what you pay on a monthly basis. Generally, car loans require between 10% to 20% of the purchase price for a down payment. The amount you get for a trade-in vehicle can be part of it.

You choose your lender, which can be your bank, another bank if they have better terms, a credit union if you belong to one, or the dealer’s own financial institution, which in our case is Kia Finance America. Dealer financing can be a good option when the manufacturer is providing incentives. It is a good idea to research all your financing options before shopping

Your monthly payment will depend on how much you are borrowing, the loan term (24 months, 36 months, etc..), and the interest rate. For banks and credit unions, the interest rate will depend mostly on the prime lending rate – which fluctuates with the state of the economy and your credit score. Dealer financing can be influenced by these as well, but again, manufacturer incentives can play a part. With each payment, you pay down the cost of the car, known as the principal, and the interest. What you pay toward the principal reduces what you owe on the car. Once the loan is paid off, you are the legal owner of the car. You can keep the car, sell it, keep it, or give it away if you want. You can sell the car while you still have the loan, but any money from the sale goes to paying off the loan first. 

Car Leasing Basics

Aside from an upfront nominal cost of fees and taxes, leasing often requires no down payment, so you will simply have monthly payments for the length of the lease, which is usually two to four years. At the lease end, you turn the car back to the dealership. Most people at this point lease another new car, but you do have the option to buy back the car you turned in. Unless you have been saving up, this will likely involve financing with a used car loan.

A leased car is technically not owned by you, so there are usually terms governing the car’s use. The biggest rules involve a maximum amount of accrued mileage and the allowable wear & tear on the car at lease-end. You will pay fees for exceeding these. In some cases, mileage limits and other lease restrictions can be negotiated in advance. 

If you use your car for business, there can be some tax advantages to leasing. As these tax deductions are highly dependent on specific circumstances, this should be discussed with your employer or accountant to determine how the tax advantages apply to you.

Leasing Pros and Cons

Pros

• No down payment: You can lease a car with less money upfront. However, having money for a down payment will reduce your monthly payment.
  • A nicer car: Generally, you can get a more expensive car for the same monthly payment when leasing.
  • No-cost maintenance: Most leased vehicles have a paid maintenance deal with the dealer, so you won’t be paying for maintenance during the leasing period. If something unexpected goes wrong, the warranty usually covers most of the cost.
  • Continually drive a new or newish vehicle: Leasing makes it easy to continually hop from a 2 – 3-year-old vehicle to a new one without directly incurring the costs of depreciation.

  Cons

  • Mileage restrictions: Allowed mileage often ranges from 10,000 miles to 15,000 miles per year. Fees are often between 10 and 25 cents per mile over the limit.
  • Wear and tear fees: Often dents, scratches, dings, scrapes, or interior stains can be difficult to control, nevertheless, you will pay for them at the lease end.
  • Eternal car payment: Your car is never paid off. As long as you lease, the payments simply continue and often increase with the increasing cost of new cars. 
  • The timing of your next car is dictated by the lease. If you see a car you want coming out in six months, but your lease is up next month, you won’t be able to wait before securing your next car. 
  • Ending a lease early usually results in high fines: If things change and you can’t afford your payments, or you don’t need the car, ending the lease early can be expensive.

Financing Pros and Cons

Pros

The pros of financing all revolve around the fact that you own the car. You have the freedom to do what you want with it. You can drive it as far as you want, as hard as you want. You can sell it when you want and customize it as you want. If it gets damaged, it is up to you how to fix it. As long as you keep making payments, your lender doesn’t care. And, once the loan ends, you can simply keep it, possibly saving the payment money for your next down payment along with the trade-in of your car. 

Cons

• Higher upfront costs. You need to have money saved up for the down payment, and most likely, your financed payments are going to be higher than lease payments for the same car. 
• Greater complexity: If you arrange your financing separately from the dealer, your car purchase can be a multi-step process, whereas leasing is usually a single-step process at the dealership. 
• Maintenance costs: You’re responsible for most, if not all, maintenance costs, so you need to budget for these costs as part of your ownership costs. 
• Replacing cars frequently can get expensive. New cars depreciate quickly, creating a significant gap between your current car and the next one.

Financing and leasing have both worked well for people. About 86% currently choose to finance a loan, though leasing once rose as high as one-third of all new vehicle transactions. The sales consultants at Cowboy Kia are well-trained in both options, but the decision of what is best for you ultimately has to do with your own preferences. In general, if you enjoy always having the newest model and features, leasing may be your

best bet. On the other hand, if you value freedom in what you want to do with your car, financing may be the better route.