To Lease or Finance?

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To Buy, or not to buy: that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous ownership,
Or to take arms against a sea of troubles,
And by opposing Lease them?

Okay enough with the poor Shakespeare imitation, let’s get down to business.  Everyone at some point decides that they want or need a new vehicle, one of the most debated questions to most new buyers is not whether to get the technology package or not, it’s usually whether they should lease (rent) or finance (buy) the vehicle. Now, before I get into the details of either options, I think it’s a good idea to go over some of the terminology which is associated with either Leasing or Financing a new car.


terminology

1)  APR – Annual Percentage Rate, basically the interest you would be charged should you lease or finance the vehicle from the dealership.  This value often is a deciding factor as the offer differs between lease and finance.

2)  Down payment – Amount of Cash you are willing to put against the total purchase value of the vehicle.  Usual rule of thumb is that for every $1000 put down, your monthly payments reduce by $20.

3)  Trade-In Value – Often people are getting rid of an older vehicle and therefore trade it in and use the cash value towards the purchase of the new vehicle as a down payment.

4)  Residual (Buyout Value) – A vehicle’s residual value is only available when leasing the car.  This is the value of the car at the end of your lease term, should you decide to buy the car out from the dealer.

5)  Freight – The cost of delivering the car to you.

6)  PDI – Pre-Delivery Inspection, basically the cost the dealer charges to inspect the vehicle prior to delivery.

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Now that we have gotten through some of the terms I will be using in this article, we can look at the differences and hopefully help you figure out which is a better option.  For the purpose of this article, I will be using figures and calculations for a 2009 Volkswagen GTI with all the options.

leasing

keysLeasing is similar to renting, you never really own the vehicle, you merely agree to a term for which you agree to borrow the car.  90% of the time, leasing is cheaper than financing for the simple reason that the auto manufacturer has a 50% stake in the car rather than you taking 100% ownership, as is the case in Financing.  Let me explain, the car in question has a total cash price of approximately $35,000 (taxes included).  To lease this car with zero down payment over the course of 36 months at an APR of 1.9% will cost you $570/month.  At the end of your 3 year contract, the residual on the car is close to $14,000 which if you like, you can buy the car out or simply return it back to the dealer which then, they can sell  it as a used vehicle.  And that in turn is where they have that shared interest in the car.  In my personal opinion, one should NEVER put any money down towards a leased vehicle for the simple reason: it’s money you will never get back or see any benefit against, especially if you are not buying the car.  Should you be thinking of buying the car at the end of your lease, why not put that down payment in to a 3 year investment and let it make money for you, which you can use at the time of purchase.

Another benefit I find with leasing vehicles is that at the end of three years, you are able to move into something newer and trouble free.  Leasing I feel is more in tune with someone who does not want the long term commitment of owning a car.

financing

car-loan_FullWhen financing a vehicle, you are taking full responsibility for the total value of the car.  In this car, you are responsible for a total purchase price of $34,476.30. Now like most people, I don’t have $35K in liquid cash under my mattress or in the bank.  So like most, I would either borrow the money from the bank or from the dealership depending on which one is offering a lower APR.  Currently, VW Financing is offering 0% over the course of 36 months (should you qualify) to borrow that money.  This is a really good deal in that you are basically borrowing the funds free of charge.  However, in order to pay off the car in 3 years, you will be making $957.67 payments every month, and not to forget, you will also have to pay for your insurance and fuel, which in conservative measures would round out your car monthly total to in and around $1200/month.  If this amount is something that you are comfortable, then yes, it’s a good move since the money you are borrowing is not costing you anything and at the same time you have put no money of yours down against the car.  This I would say is the ideal situation under which you would want to finance a vehicle.

However, most of us would try to bring that monthly payment down to a manageable amount, say $570/month, similar to the lease payment.  In order for you to make the same monthly payment as someone leasing the car, you would need a WHOPPING $15,000 to use as down payment at the time of purchase.  That is FIFTEEN THOUSAND DOLLARS for a car which has a residual value of $14,000 after three years?  If you have that kind of money to put into a car, please for God’s sake, put it towards your mortgage or an investment.

Remember, a car is never worth the value you paid for on day one.  It constantly gets cheaper and cheaper as the years go on.  It’s a depreciating asset and there is no logical sense that you put your hard earned money towards an asset which is not going to be worth its purchase price.  Now, if you are one of the lucky ones who are able to simply walk into a dealership and put down $35,000 without having to borrow the money, then yes, I would say buying the car would make sense.  However, that is not the general stance of people and therefore I do not think financing a new car makes a lot of sense.

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Now everyone is different, and so are their financial situations.  To some, the option of constantly spending a monthly amount on a car may not be the most ideal scenario, and would rather have something at the end of the term of their contract.  To others though, the prospect of having something new every three years is very appealing and would rather spend every month than have a car six or seven years old and have to be responsible for the maintenance and constant care that comes with aging cars.  Which ever you prefer, I hope the article is able to shed some light and guidance which will be useful, and as always, feel free to leave comments or questions and I will be more than happy to get back to you on them.

related links

Wolf in Sheep’s Clothing

Rent a Super Car!

First Impressions

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