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When it comes to driving a new car, there are two options you can go with if you don’t want to buy the car upfront in cash: financing and leasing. The difference between the two can be confusing and both options come with their own pros and cons. Here is a quick guide on the differences between financing and leasing that might help you make a more informed decision.
Who owns the vehicle?
When you purchase a vehicle the vehicle is yours. However, unless you’re purchasing the entire thing with cash, financing will be involved. With financing you are lent money to make the purchase then you pay the lender back with minimum monthly payments at a certain rate of interest. These numbers are all agreed upon up front. The vehicle is yours, but if you fail to meet the obligations of the lender, they have the right to repossess it.
What up-front costs are there?
When financing, whoever the lender is will likely request a down payment. A down payment helps them minimize their risk and lowers the amount you need to finance. The minimum down payment will vary based on the price of the vehicle, your credit score and the length of the loan. You can also trade-in your current vehicle’s equity to help with a down payment. If you want to put down more than the minimum you can, the more you put down the lower your monthly payments will be.
How does my vehicle keep its value?
You can sell your vehicle at any time, even if you’re still making payments on it. However, the amount of your loan balance will count against the vehicle’s value. A vehicle’s value will depreciate naturally once it is purchased and driven off the lot. It is possible to have “negative equity” on your vehicle if its value is lower than the amount you owe. Vehicle depreciation depends on the miles put on it and how well it is maintained. (Be sure to protect your investment by getting regular maintenance and repairs from a factory-authorized facility!)
What happens when I am finished paying?
Once you are finished making finance payments the vehicle is 100% yours, which means it can no longer be repossessed and no remaining loan balance will count against the vehicle’s value. The lender will send you a Lien Release as proof the vehicle is fully paid off.
What are the best vehicles to buy?
If resale value is a big factor in your decision then a vehicle that holds its value the most should be considered (also you might consider leasing). If you’re going to keep the vehicle forever or pass it down to a family member then something with a low cost of ownership might be best.
Who owns the vehicle?
When you lease a vehicle you don’t actually own it, you are paying for the use of it for an agreed upon number of months and miles. In leasing the lender is the one who owns the vehicle. That is why the monthly payments are generally lower when leasing versus financing.
What are the up-front costs?
Many leasing options don’t require a down payment. Usually you pay for the first month, a security deposit and any applicable fees and taxes. You have the option of purchasing extra wear and tear coverage and GAP insurance to protect you, as well as more miles to make sure you don’t exceed the limit. You also have the option of making a down payment (also called a “cap cost reduction”), which can lower the monthly payments and potentially give you more options when your lease ends.
How does the vehicle keep value?
Since you don’t own the vehicle you are leasing, resale value isn’t your concern. It is a concern of the financial institution however. When you sign a lease there is an expected residual value the vehicle will have by lease end. If you exceeded the agreed upon miles limit or has too much wear and tear it could affect the expected value and end up costing you at lease end. It is also possible to have “lease equity” at the end, which means the actual value of the vehicle is greater than the expected value. Having “lease equity” can give you more options at lease end.
Can I lease a used vehicle?
Yes. Though most people lease new vehicles, the same rules apply for leasing a used vehicle as a new one. In most cases if you want to lease a used vehicle it must be from the manufacturer’s used vehicle program, like Subaru Certified Pre-Owned. It isn’t always the best idea based on the numbers; because it is more difficult to determine the expected value of a used vehicle and financial institutions don’t always want to lease a used vehicle, but leasing used is definitely an option that you can explore.
What happens when my lease is over?
The end of a lease presents you with a couple of options. Most people simply return the vehicle and start a new lease on something else. Some decide to purchase the vehicle outright at the end of a lease. Check out an in-depth lease end guide here.
What are the best vehicles to lease?
The best vehicles to lease are ones that hold their value the best. The less a vehicle depreciates during the lease term, the less you pay!