Leasing a car can seem like a very attractive option when you see all the ads the car companies put out with the low lease payment front and center. They always make leasing sound like such a good deal. But is it better than financing a car?
Let's take a look.
Leasing vs. Financing
First let's define leasing vs. financing.
Financing the purchase of a car is actually financing the ownership of a vehicle. When you finish paying the loan, you have a car to show for it, however depreciated it might be.
A lease, however, simply finances the use of a vehicle for a specified number of months, sort of like renting.
When you use a loan to purchase a vehicle, you own the vehicle, and the vehicle is used as collateral against the loan. Once you finish paying off the loan, you have something tangible to show for the money you spent, and you can drive your car payment free until it dies, if you choose.
However, financing the purchase of a car does have its drawbacks in that the interest and fees of financing add up over time, causing you to spend thousands more than just the purchase price of the car. In that scenario you end up spending thousands of dollars extra for an item that is continually going down in value.
That's a financial double whammy!
What About Leasing a Car?
When you lease a car, you're paying for the privilege of using a car that you don't own for a period of 24-60 months. The payments are lower than financing a purchase, but you will still need a down payment in the form of cash or a trade in.
There will also be fees involved to initiate the lease and turn in the vehicle at the end of the lease, as well as sales tax on the transaction.
While you're driving the vehicle you will be required to pay for all maintenance and repairs on that car you don't own. At the end of the lease you'll also be charged for any damage to the car beyond normal wear and tear. You will also be subject to annual mileage limits (usually 10-15,000 miles) with steep charges for every mile over the limit.
Is Leasing Better Than Financing?
So, is leasing better than financing a car purchase?
Let's look at it this way: When you lease a car, you're paying for the maintenance and depreciation on a car that someone else owns. At the end of the lease the dealer will sell the car on their used lot for a profit, allowing them to make money on both transactions. Leasing is by far the most profitable way for a car dealer to sell a car.
When you finance the purchase of a car, you pay extra in the form of interest and fees as well as depreciation on a car that you actually own. At any point you can sell the car and hopefully recoup some of the costs, or you can drive the vehicle debt free for many years after the payments end. This kind of financing makes a profit for the dealer as well, but not as much as a lease would.
The Best Way to Finance a Car
Of course, there is a third option to financing a car that too many people never even consider. But when you manage your money right, it's the absolute best way to finance a vehicle period.
PAY CASH!
I can hear you now, “I can't do that! Cars are expensive! I don't have that kind of money!” and a million other excuses. But it CAN be done, and it's not that hard to do, you just have to commit yourself to thinking and acting a little differently, and be willing to go through the process. If you can pay a car payment month after month, you can pay cash as well.
We Paid Cash for Our Cars
Angie and I got our cars paid off several years ago, and since then we have paid cash for two three cars. We bought a nice, used Infiniti for my wife a few years ago after driving her financed car for 250,000 miles while saving our money.
Just last week I bought myself a beautiful used Lexus SUV after driving my Jeep Grand Cherokee that I financed 13 years ago. I drove that sucker for over 320,000 miles and saved money for that Lexus because we swore we would never have a car payment again, period!
So curb your whining, learn to think and act differently when it comes to financing cars.
YOU CAN DO IT!
You can read here about the 4 simple steps you can take to pay cash for your cars for the rest of your life!
Question: Have you ever leased or financed a car? Have you paid cash for a car? Tell me about your experience in the comments.
Resources:
How to Pay Off Debt When You Live Paycheck to Paycheck and Have No Money
Multiple Streams of Income- What is it and Why Do You Need it?
Cash is always the answer! Cars lose so much value when driven off the lot. We bought a Honda for $4K here in town as opposed to the first car we bought ($26K with $450/mo payments). OUCH!
I love it! Cash is always king.
Nice job breaking down all the options, have you ever thought about potentially financing/buying a car from an auction? From what I hear, you can score a killer deal and even re-sell the car on the market for a small margin.
Actually, we bought my wife’s Infiniti from an auction a few years ago. We got the car for $3-4,000 below retail. It only had 41,000 miles and looked showroom new. We paid about 1/3 of the original retail price compared to when it was new. It was a very, very sweet deal!