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Leasing a Car vs. Financing a Car:
a Beginner's Guide

by Christopher Burdick

Many of the customers that we work with here at AutoHeroes have no interest in leasing an automobile for one of two reasons. First, they think that it's a bad idea to lease, for whatever reason, or second, they do not know the advantages of leasing.

If you fall into either of those categories, then read on!

Leasing is a terrific way of getting a new car, if you fit a certain criteria. Typically, people who would benefit from leasing are those who drive under 20k miles a year, and have a safe place to keep their car (ie: not parking it on the street).

Let's say that a particular customer fits these criteria. What might convince them to lease a car? Let's take a customer I am working with right now. She is a 30 year old woman who got a great job out of business school and is making a good amount of money now. Her old Honda Civic is on its last legs, and it's time to find a replacement. She is looking at a BMW 325ic, so we'll use that car for a comparison.

Let's look at how much money she would spend over three years if she leased the car versus paid for the car through financing, versus paid cash for the car.

The price that I have negotiated for her on her BMW is $34,405.00. The residual value of the car (what the dealer figures the car will be worth after 3 years) will be about $25,000) When all the taxes, etc. are added in, she is looking at a monthly lease payment of about $407.00 over 3 years of ownership. Since leases generally run for 36 months, we'll say that after the first lease ends, she'll get another new car with a lease the same as the first.

Now, if she decides that she wants to make payments on the car, stretched out over 5 years. Using the same sale price of the car, she is looking at a monthly payment of $683.36, at 5% financing per year.

Now, here's a spreadsheet I made up that shows her costs over a period of 60 months:

Chart: Leasing  vs. Financing vs. Cash Payment

So let's make it easy and look at each option:

Leasing

There are a few advantages to leasing. First, an individual who could not afford to finance a certain car due to high monthly payments can lease the same vehicle for a lower monthly payment. Second, by leasing a car, you turn the vehicle in before the factory bumper-to-bumper warranty expires, and therefore you never have to deal with mechanical difficulties. Also, at the end of your lease, you can walk away from the car, and not have to worry about negotiating its trade in value. At the end of 36 months, you're done. The disadvantage of leasing is that in the long run, the customer will spend more money than through financing or by paying cash.

Financing

If you don't like the idea of leasing because you want to own your car, but you cannot afford to buy the car outright, then financing is the way to go. Financing is the way most people decide to pay for their cars, however it may not be the best way. The high monthly prices can make for a problem at the end of the financing period. Some people find it hard to pay upwards of $700.00 a month for a car, especially in that last year of financing where the customer would be driving a 5 year old car, and still be making those payments. Leasing sometimes looks really good in this situation.

Paying Cash

Paying with cash makes the most sense on paper. By buying the car outright, you avoid finance rates and the hassle of making monthly payments. However, by keeping the car for a long period of time, you are virtually guaranteed to take a hard hit when it comes time to trade the car in. If a customer can afford to pay with cash, it makes the most financial sense if they trade their automobiles in after every 3 or 4 years, before the value of their car really depreciates.

When it comes time to make a decision as to which method of payment makes the most sense for you, examine the benefits of each choice. The method you choose should be dictated by what makes you feel the most comfortable and which fits your needs best.

 

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