Thursday, October 17, 2013

Consumer Advice: Leasing vs. financing

Getting a new car is always exciting. That new car smell, the shiny new paint, and all of those wonderful new toys to play with. Along the way, hands were shaken, deals were struck, and papers were signed, but one of the key decisions that many new car buyers struggle with is whether to finance their new purchase or lease it. Leasing has become increasingly popular as new cars have continually gotten increasingly more expensive and credit became increasingly easier to access. There are detractors of both methods, but paying for a large purchase, like a car, in cash is out of reach for most people and most buyers must find a way to finance their purchase. Both traditional loan financing and leasing have their own pros and cons and the conditions that suit each buyer's needs may lend themselves favorably to one versus the other. While this may not cover every possible variation, the goal is lay out some general guidelines to help you decide which path if the best for your needs.

Let's start with the more maligned option, leasing. The idea behind leasing is that the leasing company, most frequently an arm of the vehicle manufacturer, has predetermined a value of the car over a specified period of time. When you choose to lease a vehicle, you are offered a monthly payment for a fixed period of time, and at the end of the term, you have the option of purchasing the vehicle at the predetermined residual value, or you can simply turn the car in and part ways. This part, we believe most people understand.

East Brother's 2012 Acura  TSX is currently leased...
Usually, the biggest confusion about leasing is around what options a buyer has when it comes to doing something with the car before the end of the lease term. Most people assume that with a lease, you are stuck with the car until the end of the lease. However, just as with a traditional loan, there is a payoff amount. A leasee who wishes to purchase the car earlier than the end of the lease can simply come up with the payoff amount and turn that into the leasing company. At that point, the vehicle becomes theirs, in much the same way as paying off a traditional loan. Because of this payoff amount, a leased vehicle can also be traded in or even sold if the leasee wishes.

Of course, unlike a traditional loan, there are a few more limitations with a lease. For instance, most leases come with between 10,000 and 15,000 miles per year. Additional mileage can always be negotiated at the start of the lease and the penalty for exceeding the mileage is usually made pretty clear in the lease agreement. Other limitations include keeping a leased car fairly stock, or at least keep all of the parts so that the car can be returned to stock when returning it, and all efforts should be made to try to keep the car in fairly good condition to avoid penalties upon returning the car. Also, leases are generally limited to new cars because the residual values are much more difficult to predict for used vehicles.

Leases are generally a good option for people who have businesses that can help offset the cost of the lease by absorbing some, or possibly all, of the cost and people who have a tendency to trade cars frequently. If you drive very few miles and are prone to wanting a new car every few years, then leasing can offer a lower cost way to get into a new car compared with traditional financing. However, if you drive a lot of miles or tend to keep cars for a long time, then traditional financing makes more sense.

...while West Brother's S2000 is financed
The traditional financing route offers the greatest flexibility and is the one most people are familiar and comfortable with. Over the course of the loan term, the buyer will pay off the entire value of the car in addition to the interest from the loan. However, when it comes time to sell, a buyer need only consider resale value and compare that against their payoff amount to decide if they are willing to make the deal. There are a lot fewer conditions around a traditional loan which means that resale value is less guaranteed, but buyers are free to modify the car to their heart's content. This sort of freedom is very liberating for some and allows them to really get creative with what they do to their cars. Plus, a traditional loan can be used on any kind of car, new or used, opening up a lot of potential options. And at the end of the loan, not having a car payment is definitely a nice benefit.

When buying a car, there are already a lot of things that a prospective buyer needs to consider already. Hopefully, this article helps make it easy for a buyer to decide on a lease versus a traditional loan. Regardless of which financing option is selected, the negotiating process is the same: focus on the price of car, stay away from the trap of the monthly payment, and try to get the best deal possible. In the end, the goal is to get a great deal on a car that you will enjoy. We have leased or financed several cars over the last decade and every time, we drive away with a smile on our face.