Buying a car is an expensive proposition. You want to do your research and make sure the vehicle you’re purchasing is best for your needs. The decisions don’t stop there, though. Once you’ve chosen the car that best suits your lifestyle and budget, you must decide how you’re going to pay for it. There are generally two options when shopping for a vehicle: you can finance it or lease it. There are pros and cons to both options, but first we should explain what each of these terms mean.
Financing a car
When buying a car and financing a car payment, you are amortizing the cost of that car over several months, with an agreed interest rate. Most car loans are usually on five-year terms. If you are borrowing the entire cost of the car and staying on your payment schedule, you will have paid off that loan and own the car outright at the end of five years or 60 months. Some banks offer eight-year car financing options, but for this example we will go with a five-year term. When you own the car entirely, after the warranty expires, you’re responsible for all of the maintenance and repairs. Maintenance costs can be high as the car ages. Car warranties generally last anywhere from three to five years.
Leasing a car
When you lease a car, you are borrowing the deprecation cost of the term you agree to. During this process, you will hear the term residual value. This is how much the car will be worth at the end of your term. The leaseholder is responsible for making car payments equal to the car’s ticket price, minus the residual value. For example, if you lease a car for three years, you agree to make payments in the amount that the car will depreciate from brand new to when the lease agreement is up. Since cars tend to depreciate quickly in the first few years, you will be making the highest payments the car will ever warrant during that time. Lease rates are often higher than traditional financing as well. So you will be making higher payments on the loan too.
Breakdown of costs when buying a car
Let’s use the example of a person buying a car, in this case a Honda Civic Sedan DX, which is currently priced at $18,517.50. According to Honda’s payment calculator, the monthly payment for a lease will be $260.65, based on a 48 month term, with a lease rate of 2.99 per cent. By leasing that car, over 48 months you will make $12,511.20 in total payments. At the end you will have the option to buy the car out at its residual value. That is an additional cost of $7510.50. If you do that in the end, the car will cost you $20,021.70.
The same car, if you financed it, would cost you $328.56 a month based on a 60-month term, with a financing rate of 2.49 per cent. At the end of your 60-month term, the car will cost you $19,713.60.
In the end this car will cost you an extra $308.10 if you lease. That might not seem like a huge difference, but this only works if the objective is to own the car for the long term, meaning 10 or more years. But if at the end of the term you trade in your leased car for a new one, you will continue to make monthly payments in order to have a car, albeit maintenance free as the car age and extended warranty protects you.
Maintenance costs when buying a car
According to Consumer Reports, “expenses can skyrocket when warranty and free-maintenance periods are over.” They say a Honda by its 10th year of life will cost the owner $455 a month in maintenance on average. Compare that to a newer Honda, less than three years old, that costs $145 a month in maintenance. Using those numbers that same car, even after the term is over will cost you more and more.
When buying a car, leasing costs more than financing in the long run, but the difference between leasing and financing may not be as great as many believe. And having a car that is maintenance and worry free has an intrinsic benefit any car owner can attest to. Lastly, when considering leasing vs financing, calculate how much you drive. Lease agreements often come with a limit on how many kilometres that car can drive annually. If you are driving more than that limit, your only choice would be to go with financing, where there are no rules on how much you drive.