Should I Buy (Pay Cash), Finance or Lease?
This is probably one of the most common questions asked by consumers looking for a new vehicle. Ultimately, it is a personal decision based on your current and anticipated ownership habits. This article will give you some of the key questions you should ask both yourself and the dealer when making this decision. It will also lay out some of the advantages and disadvantages of each.
Paying Cash vs. Financing
First let’s align paying cash with financing since these two options are very similar. In both scenarios the consumer is responsible for the entire purchase price of the car plus any applicable taxes, tags, fees, etc. The tax is based on the entire purchase price and he entire amount is paid to the dealer upfront. Yes, even in a finance situation, the dealer is paid upfront, the only difference is the bank pays the dealer the amount the consumer finances. The consumer then pays the amount financed back to the bank plus interest over the term of the loan.
When you lease a car, the leasing institution will predetermine the estimated future value of the vehicle and you pay on the difference between the purchase price and estimated future value of the vehicle plus the lease charges that are assessed by the leasing institution for advancing the purchase price of the vehicle to the dealer. Unlike a purchase, the taxes are generally paid on the monthly payment or the depreciation and not the entire amount. (Though this can vary by state)
These examples are not exact and you should ask your dealer for an exact comparison but may be a good illustration to help you better understand the differences. In these examples we are excluding taxes, tags and fees to simplify the concept.
Again, these examples exclude taxes, tags and fees and the payment will be impacted by both the term of the loan / lease and interest / lease charges assessed by the bank.
Residual / Future Value
This figure is established, in advance, by the leasing institution. This figure is influenced by historical data as well as anticipated mileage and condition of vehicle on return. A 10,000 mile per year lease will be less expensive than a 15,000 mile per year lease because the value of a low mileage vehicle will be higher at the end of the lease. It is also assumed the vehicle will be turned back in good condition.
Advantages / Disadvantages of Paying Cash.
Owning a car outright means that it’s yours. If you ever want or need to sell it, you can. If you take good care of the vehicle and choose to keep it for an extended period of time you can enjoy the vehicle for years without payment. If you decide to trade it, 100% of the equity can be applied to the new vehicle. Because there are no mileage restrictions, you can put as many miles on it as you want with penalty. The only impact these miles have are potential additional depreciation. Scratches and damage are also only an issue as it impacts the value of the car. You can also customize the vehicle as you choose. The biggest disadvantage is that you no longer have access to the cash investment you made in the vehicle.
Advantages / Disadvantages of Financing.
Financing is similar to owning a car from the standpoint that once you have paid the loan in full, you can drive it for an extended period of time without any payment. Because there are no mileage restrictions, you can put as many miles on it as you want with penalty. The only impact these miles have are potential additional depreciation. Scratches and damage are only an issue as it impacts the value of the car. You can also customize the vehicle as you choose. The disadvantage is the if you have little or no down payment, you could owe more than the car is worth for a few years.
Advantages / Disadvantages of Leasing.
Leasing is usually best for someone who likes to trade their vehicle in regular cycles. Since you are only paying on the depreciation of the vehicle, it often allows for the consumer to get an upgraded vehicle at the same or lower payment. However, since the leasing institution has predetermined the value of the vehicle at the end of the lease and given you credit for that amount, they do have mileage and vehicle condition limitations that you need to adhere to or this could cause charges at termination. It is also rare to have equity at any time during the lease as the structure by its nature is designed to be at residual value at the end of the lease. And since it will be returned to the leasing institution, you need to be careful with modifications to the vehicle.
In summary, as mentioned earlier, it is a personal decision. The following questions can help you decide what is best for you:
- Does owning a vehicle outright give me peace of mind?
- How long do I want to keep the vehicle for?
- How long do I usually keep vehicles for?
- How many miles a year do I drive?
- Do I like a new vehicle more often?
- Do I keep my cars in good condition?
Ask one of our sales associates to present the different options that can help you make an informed decision.