Shopping for a car is overwhelming. Not only must we choose between new or used, decide on a make and model, and sort through safety features and trim packages, but then we need to decide how to pay for it. If youâve got the cash to pay for your car in full up front, it can be a smart financial move to do so, thereby avoiding interest expenses and higher insurance prices (weâll get to that). But, most of us end up choosing between financing and leasing a new car. So, how to know whatâs best? Weâll walk you through the three key steps.
For some, the choice is simple: If you want to own, then youâll choose financing. If youâre hesitant to commit to a vehicle for more than a few years, youâll choose to lease. But if you just want make the best financial choice, you should probably consider a few different factors mentioned in The Zebra’sÂ “Should You Buy, Finance or Lease Your New Car?” post:
Finance if you:
Lease if you:
David Bakke, personal finance expert at Money Crashers, offers his advice on what to ask yourself before leasing:
Leasing is a commitment, and terms vary from place to place, so be sure you know what you want from the experience.
You can finance your lease through the dealership or through a bank or credit union, and you should compare prices for a few different options because rates will vary.
If youâve never leased before, figuring out what constitutes a good price can seem alien, but the general formula is actually fairly straightforward. According to Edmunds, the amount you pay will involves:
Edmunds has an excellent lease price calculator, though theyâre careful to note that you wonât be able to calculate a potential lease down to the last nickel before actually speaking with a few dealers since there are so many pricing, tax and fee variables involved (detailed in the following sections).
Itâs better to pay for a down payment with your own funds, rather than borrow. âContrary to when you buy a car, you do not want to make a significant down payment on a leased car,â Bakke explains, because if the vehicle is stolen or totaled at the beginning of your lease, you wonât recover any of that down payment. Most experts recommend a down payment of $2,000 or under.
The following fees are usually, though not universally, associated with leasing a car in the U.S., says Bakke. When shopping for a lease, be sure to get a list of all fees so you can accurately calculate your total expected costs:
Leasing a used car isnât especially common, but itâs an option. You might find that you pay lower monthly payments since an older vehicle is likely to be worth less than a new one. However, if you lease used, the car probably wonât be under warranty (one of the major benefits of leasing), so youâd have to pay out of pocket for any repairs or servicing.
Whenever you buy a car, insurance should be a key consideration â after all, itâs the biggest car-related expense after financing the vehicle itself (even in front of gas).
The Zebraâs own licensed insurance agent and adviser Neil Richardson says insurance is typically more expensive on a leased vehicle than if you owned the vehicle outright. Leasing companies and dealerships want to protect their property (which will be theirs again when your lease is up), so they require high levels of insurance coverage.
According to Richardson, when leasing, you usually need to carry:
Many major U.S. insurance companies (and some independent ones) will also require you to have the same level of liability coverage for each vehicle in your household, so if you lease, rates on your other household vehicles could go up (but you wouldnât necessarily have to add comprehensive and collision to other vehicles). In The State of Auto Insurance Report, The Zebra found that the average yearly premium for a policy carrying just the state minimum limits of liability is $529 while the average yearly premium for a policy with 100/300/100 limits of liability, with no comprehensive and collision coverage, is $692 â a $163 difference.
So, if you own a car with a policy covering only your stateâs minimum limits of liability and then your household leases another car, will youÂ have to pay an average of $163 more for the policy of the car you own? RichardsonÂ says itâs not always that cut and dry: âDrivers are usually given discounts for insuring multiple vehicles and insurance pricing on the vehicles themselves would vary based on year, make and model.â
So, should you lease? Weâve armed you with the details. Now itâs up to you!