Few people have the means to buy a new vehicle outright with their own pocket money. So rather than resorting to a life of crime to make the nut, taking out some kind of loan to afford a new car is the only real option. Loans mean repayment calendars, and being responsible to somebody more than yourself.
So, you’re generally left with two options: to lease or finance? While leasing and financing both feature broad similarities – including being able to negotiate everything from monthly payments, down payments, interest rates, etc. – but everything else differs greatly.
When financing, you spread the entire cost of the vehicle – including all the taxes, delivery and fees – out over your desired number of months. Generally, the longer the term, the smaller the payments, and interest rates offered are generally lower.
When leasing, the term is usually much shorter – say two to three years – and the company will figure out what it thinks the vehicle will be worth at the end given its condition, equipment, mileage and more. The amount between the total sale price and the predicted residual value – i.e. the depreciation – is what’s used to calculate the monthly payments. Because the amount of money you’re borrowing is less than when financing, your monthly payments are much lower.
If you are planning on paying for a new vehicle with an option besides cash up front, one question to ask is how long you should stretch out the payments? Sure, that zero per cent offer looks appealing, but they are sometimes restricted to deals split over 72 months or longer. Getting trapped into a six- or seven-year contract could be too much of a burden. The last thing you need is to be upside down on a vehicle – meaning you still owe more in payments than the vehicle is worth – if your life and finances change drastically.
Deciding to lease will depend on a whole lot of factors. If you put on a high number of kilometres every year, you run the risk of going over the agreed-to limits, and overages for excess mileage can be severe. If you agree to a limit of 12,000 km a year for three years (for a total of 36,000 km over the term) and you return it with 40K, and you’re paying $0.15 per kilometre in penalties. That’s an extra $600 – the same as one or two extra payments worth – that you’d need on hand when the lease is up.
Same goes for damage over and above what the dealership considers as “normal” wear and tear. If your car has scraped wheels and body damage, you’ll be charged to fix or replace them. And some leases require servicing be done at a dealership rather than an independent shop in order to ensure the regularly scheduled maintenance has been done according to the manufacturer’s specification.