I’m sure we’ve all seen the holiday car commercials boasting things like “0% apr” or “qualified leases” this and “dealer credit” that. It all sounds like a bunch of financial babble that’s meant to sound attractive but actually serves to drown out the caveats of buying a new car. Here at Project DRIVE, we’ve dug a little deeper into the pros and cons of lease vs finance, and what each option means for you.

Keep in mind that there are options that will best suit each person’s individual financial needs and that the ideas expressed in this article are our opinions based on research we did. We are in no way financial professionals.

What is a Lease?

A lease is an agreement is essentially a way for a consumer to “borrow” a car from a dealership. Lease payments don’t represent payments towards owning the car, they represent you paying the dealership (the owners of the car in this case) the cost of using the car over your lease period, commonly 36 months. Most leases require you to make an upfront payment that will include the first lease payment, as well as acquisition fees (pretty unavoidable when buying a new car) and some other fees like taxes. Since you are technically borrowing the car, you don’t get to keep it at the end. So why lease?

Pros:

• Most leases last for the warranty period, so if you enjoy having a newer model car (i.e. you tend to sell your cars and get new ones within a few years anyway), it’s a way for you to continually trade up to the new model without worrying about resale value, depreciation, long-term maintenance, and other issues that may arise from owning a car.
• Since it’s not a loan, you’re not going to pay interest.
• You often have the option to purchase the car at the end of the lease term at a discount. The discount is usually a bit higher than the total amount of money you’ve paid during the lease term (not including taxes, insurance, and other costs), which means you will usually save a few grand if you end up buying the car.

Cons:

• Because you are not paying to own the car, if you don’t end up buying the car at the end, you will pay a few hundred a month plus the initial payment (usually few thousand) towards nothing other than being able to drive a new car for 3 years.
• If you do buy the car at the end, the price discount doesn’t account for depreciation, meaning there’s a good chance that by the end of the three years you can buy a second-hand car for cheaper.
• You have to pay for insurance, but insurance won’t pay you the value of the car if you get into an accident since the dealership is technically the owner. Simply put, if you crash, you get nothing and the money you’ve paid towards the lease goes “poof”!

What is Financing?

Financing is a short-term loan (usually 3-5 years) that you get from either the dealership or bank in order to buy the car. Loans generally have 3 major components: Down payment, interest rate, principal. The down payment is the up-front money you are required to pay. The interest rate is the “fee” you pay the lenders for lending you the money. Interest is money paid on top of the value of the loan. The principal is the remaining balance of the loan, or the amount of money you have left to pay. There are a few things to keep in mind when considering financing:

• Debt can affect and is affected by your credit score.
• Since you have to pay interest, you will pay more than the sticker price of the car in the end, but you get to keep the car and sell it if you wish.

Now that we have a basic definition of what financing a car entails, what are the pros and cons?

Pros:

• If you don’t have a lot of cash but are in need of a car, financing can soften the direct blow to your bank account by giving you more time to pay for the car.
• The car is yours, meaning if you crash it, the insurance will pay you for the car instead of the dealership.
• You can sell the car anytime you want, but will have to use the money from selling the car to pay back the loan if you haven’t fully paid it off yet.
• Well qualified borrowers (usually with credit scores of 750+ for car loans) can often get 0% APR (annual percentage rate) for the first year or so. This means that if you pay off the entire value of the loan within the first year, you pay absolutely no interest.

Cons:

• Often times, the people who need financing the most get the worst deals (i.e. people with money problems but desperately need a car to make money). This is because worse credit scores and less cash can’t make bigger down payments, which are both essential in reducing interest rate. Interest rates for car loans often exceed 10% for lesser-qualified borrowers and can go up to 24% or more, which adds up big over time.
• Failure to repay the loan (often referred to as “defaulting”) will result in drastic negative impacts to your credit score, which can hold someone back for countless years.
• You are responsible for maintenance once the warranty ends.

So which one should you choose?

Which car purchasing option you choose is highly dependent on your situation, but its important to consider how all the different factors affect you. If you are someone who has a great credit score (can get 0% APR) and pay off the car within a year, financing is the absolute best option for you. All the money you pay will go directly towards the car, you won’t have to shell out tens-of-thousands of dollars right off the bat, and you can sell the car whenever you like and make some of the money back.

However, if you’re someone that is expecting to make more money in the future but don’t have the cash now, leasing with the goal of buying at the end is a great way to save a few grand on your new car. Either way, it is important to evaluate your own financial situation and needs before buying a car.