To buy or lease a new vehicle, which option is better for you?

To buy or to lease, that is the question...

Now that you've picked out the right vehicle it's time to make the payment, and unless you've got an extra $15,000 on hand, your only options for rolling off the dealership lot in a brand new car will be with getting a loan to buy the vehicle or leasing it.

So which one is the better option? There's no clear answer as it all depends on a variety of factors, all of which can vary per individual based on preference and personal circumstances or desired outcome.

And with little unbiased information about leasing made readily available to consumers, most people by default will go with getting a loan, assuming it is their only option or the better option. 

The reality is, leasing is also a great option for some people, just as getting a loan to buy is a great option for others. The following are some FAQ's that should help you decide on which option is best for you.

What's the difference between financing and leasing?

Just to be clear, loans and leases are two different ways you can finance a vehicle, although the term "financing" is often used interchangeably with loans and in which case would be considered distinct from "leasing".

With financing aka getting a loan, you're funding the full purchase price of the vehicle, whereas with leasing you only pay for the use of the vehicle (depreciation) for the duration of the lease agreement -- each of which have their own pros and cons, depending on what perspective you look at it. 

So let's just say you're considering financing a vehicle that costs $25,000. When you secure a loan, you'll be borrowing $25,000 (the price of the vehicle at the time of purchase) plus interest fees, sales tax and administration fees -- all up-front. The outcome from this scenario is that you own the vehicle; it is your personal asset, and for some people this can be the selling point for choosing this option.

If however you were to lease the same vehicle, you'd be paying the difference on what its worth today and what its worth at the end of the term (which typically run between 36 to 48 months). So let's just say the $25,000 vehicle has an estimated resale value of $11,000 after 48 months: you'll be be paying a total of $14,000 in depreciation on your lease payments, in addition to interest charges, sales tax and administration fees.

Once the lease is up, you'll have quite a few choices available to you. You can either return the vehicle and trade it in for a new one (which can be a selling point for those who like driving the latest vehicle models), purchase the vehicle for the residual value on the contract, or you could choose the walk-away option which is to turn your keys in to the dealership for a small termination fee, plus cover any costs associated with normal wear and tear. 

Which option is cheaper?

It all depends, mainly on what you intend on doing with the vehicle in the long-run.

If for example you plan on keeping your vehicle until it falls apart, then it would be cheaper to get a loan to finance it. Once all your payments are made you can continue to drive your car without having that monthly commitment, however keep in mind that all cars depreciate the second they leave the lot.

So if you finished paying off the $25,000 car and want to sell it or trade it in, by that point it might only be worth let's just say $8,000, which would equate to a loss of $17,000 (but at least you'll have equity).

What are the pros and cons of leasing vs. buying?

When you lease a vehicle, you are essentially driving someone else's car and are given a limit on how many miles you can drive before you’re charged if you go over. Also, fees are assessed for any damage accrued on the vehicle during your lease agreement, so if you're someone who is accident-prone, likes to take long and adventurous road-trips or are a professional dog-walker, this may be a less attractive option for you. 

However bear in mind that with leasing you'll still have the option to purchase the vehicle at a buyout price at any time during the contract. What’s great about this is that you can essentially test drive a brand new vehicle for 3 years, and depending on whether you love it or are bored with it, you have the ability to decide whether you want to keep it or trade it in without having to worry about the trade-in value. 

On the other hand, if you finance or purchase your vehicle with cash, you own it. You can be as rough with it as you want and not have to worry about mileage or wear & tear. You will, however, be responsible for everything including maintenance and repairs, and you'll get way less for it when you sell it or trade it in.   Also, you will get way less car for the same monthly payment as a lease. Do you want to keep that used car for years to come? Will it last that long?

So what’s the verdict, to buy or lease?

It's a wash. If you value convenience, safety and options such as the ability to buy, choose leasing. If you value control, freedom and investing, go with conventional financing. 

At Somerville Auto near Toronto, Ontario, our automotive finance experts can help you to compare buying versus leasing costs or find the right loan that works within your budget. We also specialize in low buyout auto leasing and have the flexibility to create a lease program that best suits your needs and budget. Our team has also helped many people build equity in a vehicle so that it can be used as a down payment on a new lease.