Pros And Cons Of Leasing Vs. Financing A Car

Key Takeaways:

• Financing a car is usually the cheapest option in the long run.
• Buying a car on lease is an excellent middle ground as you can make smaller monthly payments.
• Some upsides of leasing a car include lower monthly payments, the ability to drive a new car every few years, and manufacturer warranties.
• Some considerable upsides of financing a car include complete ownership, lesser restrictions, and tax deduction.
• The downsides of leasing a car include less control, mileage restrictions, and additional costs at the end of the lease period.
• On the other hand, downsides of financing include driving costs, risk of negative equity, and overtime depreciation costs.

There are a few ways to get auto financed. You can buy it outright, lease it, or take out a loan. Each option has upsides and downsides that you should consider before making a decision.

If you have cash, buying a car outright is usually the cheapest option in the long run. On the other hand, buying a car on lease is an excellent middle ground. You can make smaller monthly payments, but you don’t own the vehicle at the end of the lease. A loan is another option, but you’ll have to pay interest.

However, you’ll need to be fully aware of both options to make a more informed decision. Let’s go over the attributes of auto leasing and financing a car to give you a better idea.

Pros Of Buying A Car On A Lease

New Car Every Few Years

For most people, the feeling of driving a brand-new car every few years makes leasing an appealing option. When the lease expires, you can place the car back with the dealership and lease a new vehicle equipped with the latest technology after a few years.

No Stress for Resale Value

When leasing a car, you wouldn’t have to worry about its resale value as you would if you were financing a vehicle. You can return the car to the dealership at the end of your lease period. This is beneficial if you live in an area where cars depreciate quickly.

Tax Deduction Potential

Leasing a vehicle for business means that you become entitled to tax deductions from a portion of the lease payments. The IRS has allowed a deduction of depreciation and financing that are a part of the monthly lease payment. However, if you have leased a luxury vehicle, the amount you can write off can be limited.

Hassle-Free Maintenance

Most new cars come with manufacturer warranties. This means that when you take a three-year lease, the manufacturer will cover the repairs. This can rid you of some significant and uncertain expenses.

Lower Monthly Payments

Buying a car on lease comes with a lower financial burden as the monthly costs are less than financing a vehicle. The smaller monthly payment encourages people to drive cars they usually wouldn’t be able to afford otherwise.

Cons Of Buying A Car On Lease

Less Control and No Ownership

You will not be able to sell a leased car or trade it to reduce the cost of your next vehicle. If your lease expires, you will continue to make monthly payments. Moreover, you are limited in terms of vehicle modification as well.

Mileage Restriction

Most leases have an annual mileage restriction of 10,000 to 15,000 miles. Going over the limit will result in mileage penalties.

End-Of-Term Balloon Payments

At the end of your lease contract, you must make a balloon payment if the car’s value exceeds the residual value specified in the contract.

High-Interest Rates

Leasing companies often charge higher interest rates than traditional lenders, which means you could end up paying more in the long run.

Pros Of Financing A Car

Absolute Control

You get complete control over the modifications for your car. The car can be bought once the loan has been completely paid off, and you can keep the car. You can also trade it or sell it as you choose.

No Restrictions

As discussed earlier, there are several restrictions on a leased vehicle, such as limited mileage and modifications. However, financing a car doesn’t include obligatory wear-and-tear or mileage charges. Moreover, you can pay for any maintenance and repairs according to your schedule.

Tax Deduction Potential

If you’re financing a car for business purposes, the IRS has allowed a deduction in depreciation costs, particularly for business owners. However, business owners must file their records according to the IRS’ guidelines and fully understand the conditions involved.

Cons Of Car Financing

Driving Costs

According to AAA, the driving cost of a new car for 15,000 miles was around $9,666 back in 2021. This cost included maintenance, fuel, and insurance costs.

Car Value Depreciation

Your car will lose value as soon as you drive it. In fact, according to Edmunds, a new car can depreciate by 20% in its first 12 months, which means if you financed $30,000 for your vehicle, it could be worth $24,000 just one year later.

Potential Negative Equity

Suppose the value of your car decreases faster than the amount you’re paying on your loan. In that case, you could find yourself “upside down” or “underwater.” This means you owe more money on the loan than the car’s current worth.

Refinancing May Be Difficult

If you decide you want to trade in or sell your car before the loan is paid off, you may not have much-negotiating power because you’ll still owe money on the loan.

You could end up paying more than the car is worth if you’re not careful, you may make payments for longer than the vehicle lasts. According to Consumer Reports, the average new car loan is 66 months. This means you could be making payments on a car that’s already 7 years old.

In contrast, when you lease a car, you’re essentially renting it from the dealership for a set period, usually two to four years. The terms of the lease agreement will spell out how many miles you’re allowed. You may not be able to refinance your car loan if the value of your car has decreased.

Are you looking for more information to come up with a decision? Here’s an article about why financing a car is worth it in 2022.

The Takeaway?

When considering the merits and demerits of buying a car on lease or financing a car, it’s essential to decide what’s best for your budget and needs. Leasing could be a favorable option if you’re looking for flexibility and lower monthly payments. 

However, financing may be the better route if you’re interested in owning your car long-term. Whichever you choose, make sure to do your homework to make the most out of your decision.

If you still feel confused about your options, our experts at Headquarter Nissan can help you. We’re situated in Opelika, AL, and offer a complete inventory of new and pre-owned vehicles for you to lease or finance. 

Visit us today for more information!