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To lease or to finance?

LEASING VS BUYING A CAR- WHAT ONES RIGHT FOR ME?

Is it better to finance a car or lease a car? What is the difference? What option costs more? What option has more value?


Let’s find out…..


There are many factors that need to be taken into consideration when deciding on a new car and one of the biggest factors is how to pay for it! How you go about financing a vehicle is a personal choice and it all depends on your long-term goals, vehicle preferences and of course, your budget.


Leasing or financing both have their own benefits as well as their drawbacks- it is all going to come down to which option suits your lifestyle better.

Here’s the run down….


**Please note that this list is not exhaustive, there will be many pro’s and con’s you will discover when doing your own research. It is always advised that when deciding on making larger purchases using a means of credit to always speak to a financial expert. **



LEASING

There are many benefits to leasing a vehicle but there are just as many con’s also, it is always wise to do your research and ALWAYS read the fine print. Here are a few points to keep in mind when exploring all your options:


  • Leasing will generally come with lower monthly payments compared to using finance. Minimal to no down payment is required but be mindful of any balloon payments that may be required at the end of the lease term.

**Balloon payments allow for smaller monthly payments in exchange for a lump sum amount owed to the lender at the end of the contract.

  • Some leasing companies now also offer vehicle leases to be taken out against second- hand cars (usually no more then seven years old), this is also another great option to keep your monthly costs down, if your happy with a second- hand car. Please be mindful of what warranty is available for second- hand cars if your exploring this option. Second- hand car warranties are usually far inferior then those that come with a new car.

  • It is also a good idea to keep in mind the costs that may be associated with returning a leased vehicle, for example, you may have exceeded the allowed mileage (most vehicle leases come with allocated mileage, eg. 20,000 kilometres per year), the vehicle has unrepaired damage, or you want to terminate the lease contract. All these issues could result in unforeseen charges.

  • A big perk of leasing a vehicle is that you will never owe more then what the vehicle is worth (assuming you have used the vehicle for general use and there is no damage to the vehicle). When using a third party to finance a vehicle there is a very high chance that at some point during the life of your loan term you will owe more then what the vehicle is worth, especially if you are financing a brand new car. This typically won’t happen with a leased vehicle as you are only paying for the value of the vehicle for the time you are planning on using it for.

  • When you are leasing a vehicle, you are basically renting the car for a fixed price for a fixed term, this is typically one to four years. During the term of the lease you are only paying for the cost of depreciation on the vehicle, not the total vehicles value.

** Depreciation is the amount the cars value declines during a certain period.

**TIP**

Different makes and models depreciate at different rates, so it is a good idea to do some research on what cars are known to lose their value quickly and what cars seem to hold their value well. Choosing a car that will hold its value will cost you less over the term of your lease, but will cost you more if you opt to buy the car back at the end of the lease.

  • If you opt for a new vehicle under a lease agreement, then you should find that the car will be covered by a manufacturer’s warranty and some manufacturers offer warranties for up to seven years. With some manufacturers even offering free or fixed priced servicing, meaning that you should never find yourself in a position where you are being handed a large unforeseen repair bill. This point also rings true for a car that has been financed as well, but unlike financing, some leases will give you the opportunity to negotiate general servicing and maintenance costs into your monthly lease payments. This allows you to have one manageable monthly cost for your vehicle.

  • When leasing a vehicle, you don’t have to deal with selling or trading in a car. Once your lease terms have expired you can opt to initiate a new lease or choose to purchase your leased vehicle at a pre-determined price. Purchasing your leased vehicle at the end of the lease agreement is an option to consider if the vehicle is still worth MORE then the pre-determined depreciated price. If the market value of the vehicle is LESS then the pre-determined price at the end of the lease then its wise to opt out of purchasing the car.

  • You may find that there are fewer financial restrictions when leasing a car. Over the last ten years or so, we have seen lending companies making it harder to access finance. Leasing companies on the other hand, aren’t typically as ‘strict’ as lenders, this is because it is much easier for them to take back the vehicle if you fail to make the payments or violate a condition of the lease.

FINANCING/ LINE OF CREDIT

The big winner of the finance vs leasing debate is that when using financing to purchase a car, you will eventually own the car- assuming that you have made all repayments on time. But, if that isn’t enough to persuade you, then here are some other factors to take into consideration when your thinking of borrowing money to purchase a car:


  • Although monthly leasing repayments are usually smaller than a loan repayment, unlike leasing, for every payment you make on your loan you are building equity and are getting one step closer to owning your vehicle.

**TIP**

It is important to monitor your vehicles market value and compare it to what is still owed on vehicle over the life of the loan. You don’t want to find yourself in a position where you OWE a lot more then what the car is worth. If you find that the market value of your car is declining quicker than your loan it may be worth bumping up your loan repayments if you can afford to.

On this note, it is also worth speaking to your insurance company to see if your policy covers the monetary difference between the market value of your car and the amount left on your loan. You don’t want to find yourself in a position where your car has been in an accident and your insurance pays out the market value of your vehicle, but that amount isn’t enough to pay out your loan.

  • Having finance over your car as opposed to a lease will give you a bit more flexibility with the car itself. You can modify your vehicle (within reason and as long it stays in roadworthy condition and insured), drive it as you please and use it to your discretion. As the cars owner you can also exercise your right to sell or trade the vehicle, but before making this decision you will have to have a conversation with your finance company because the sale or a trade of your vehicle will only be able to happen if certain conditions are met.

  • You also have the option of paying the loan on your vehicle out earlier than the time outlined in your loan agreement, meaning that you can own your car sooner than the contract expires.

  • Unlike a lease agreement, which usually has an allocated amount of kilometres you can travel in the car during a time period, when financing a car you are free to drive the car as far or as little as you would like. This also means that you are only paying for things like maintenance and fuel based on the kilometres you choose to drive, not the kilometres you are expected to drive.

  • Second-hand vehicles will provide you with the best value for money, especially when financing a vehicle. Depending on the type of vehicle, you can expect an average of a 20- 40% value decline on a NEW vehicle in the first few years of ownership. By buying a vehicle that is only a few years old you can take advantage of paying a price that has already been substantially reduced.

  • If long term savings is an absolute requirement on a new or second- hand car, then financing is the best way to go. It is more beneficial, in the long run, to buy or finance a car and keep it until the repair costs start to outweigh the value of the car.

Buying a car and deciding on the best way to fund the purchase inevitably comes down to personal preference, long term goals and affordability. Weather you choose to buy or lease, there are benefits in both, the key is to determine which benefits fit better with your lifestyle.

Weather you have already chosen a car or are not yet looking, you should definitely take the time to do some research and try to figure out what you want out of not only they type of car your in the market for, but the financial implications of the purchase.

Let this article be a starting point for research into finding what type of finance is going to suit you the best.

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