Although the car industry has never had a problem delivering some mind-boggling statistics, recent reports regarding vehicle leases in the United States are quite impressive. Namely, 2019 is a year when a record-high number of Americans will be ending their leases. With 4.3 million people turning in their leased cars, there is a good indication that the rising costs of this type of ownership are negatively impacting its popularity. Before getting into the details, however, let us go through the basics of traditional financing and leasing.
Financing Explained
As most people know, financing a vehicle means getting a loan and then repaying the balance of it over a predetermined period. This is one of the most popular and long-lasting ways to become an owner of anything ranging from a smaller asset such as a car to a permanent fixture such as a house. To get approved, you have to work with a lender who is willing to provide the funds for the purchase for you, thus, allowing you to overcome a shortage of cash. Then, you spend the next few years paying them back slightly more to cover the interest rate that they charge you for this service. After you repay the entire balance, regardless of when that takes place, you become the rightful owner. Even though you may receive a quasi-title for the car beforehand, you are not the legal owner of it as long as another entity has a financial claim to it.
Leasing Explained
Leasing operates similarly to financing when it comes to things like monthly payments and the life of the “loan.” The main difference, however, is the fact that you will never become the rightful owner. Unlike long-term loans, leases are based on using something for some time and then returning it. This is why you always sign a “lease” when you are renting an apartment or a house. The consensus in those situations is that you give up the right to use any part of the asset in question as soon as your contract is over.
So, once you sign, you get access to the car that you desire for whatever timeframe you and the provider agree upon. During the life of the lease, you make monthly payments as if you are financing off an actual purchase. What you are really doing here, however, is financing your way through the lease and paying for the right to use the car. After the period that you agreed on expires, you must turn in your car or negotiate a discounted purchase, which a lot of people do.
Benefits of Financing
According to a car sales expert who has dealt with innumerable financing agreements, Doug Ross Barrie, the first benefit is the fact that you are paying toward owning an asset. In other words, financing lets you become a vehicle owner even when you are unable to put down enormous amounts of capital to cover the entire price. Also, financing is perfect for individuals who intend on making changes to the vehicle as there are rarely restrictions on how one utilizes the vehicle. Your main responsibility is to keep making payments on the contract for as long as it lasts. Whether you decide to completely customize the car or keep it as is will be up to you.
Downsides of Financing
The most obvious downside of financing a car is that you will pay more for it because of the interest rate that comes with the loan. This is especially true for contracts that tend to carry a high annual percentage yield, which often happens when the buyer has bad credit or no credit. Courtesy of the interest payments, even those who get a decent rate will still pay more than they would if the vehicle was purchased outright.
Benefits of Leasing
As per one of the largest online retailers, Edmunds, leasing a vehicle will generally bring a noticeably lower monthly payment. This is because there is an implied discount guaranteed by the fact that the leaser still gets to keep the car once the lease is done. So, they will be able to resell it at the end and still capitalize on the remaining value. Additionally, many leases do not even carry a minimum down payment and you can simply get to drive it off as soon as you sign the dotted line. Doug Ross Barrie further explains that a lease usually covers a relatively new vehicle that is still under the manufacturer’s warranty. Since most of such coverage expires after three years or 36,000 miles, it may be hard to find it when you are financing a used car. Finally, you pay substantially less in sales taxes upon the signing, and you do not have to negotiate value when it comes to trading in the car at the end of the lease.
Downsides of Leasing
As said, a car lease means that you are essentially renting for long-term usage. Once you are done, the car does not belong to you, and you must then enter into another lease or purchase the vehicle for a lump-sum payment. Also, almost every lease has a maximum mileage count that protects the entity that is offering that car from over depreciation. If you go over that number, you could be liable for hefty fines that are often calculated per each mile above the negotiated threshold. The same applies to wear and tear as you will often have to pay hefty premiums to get the car fixed at authorized repair shops that the leaseholder has contracts with.
Making the Right Choice
Even though both alternatives have a slew of positive and negative factors to consider, it is hard to determine which one will work for you better. Financing is the more common option as people like to pay for something that will eventually become theirs. If you are looking to pay less for a newer car, however, leasing might be more optimal.
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