There has quickly been a change in the way that people buy vehicles, which many driver choosing to use some form of external financing to help them purchase their desired vehicle.
Regardless of your reason for buying a car, for most people it’s a big decision and will be one of the largest expenses that you will make. Choosing the make and model may seem like the hard part, but the real difficulty is deciding how you will finance the vehicle.
Other than paying for the car in full upfront the other main method is through a lease. When you buy a car, you pay for the entire vehicle at one time.
How Does Car Leasing Work?
The car that you would like to lease has an overall retail price, which equates to what it would be worth if it was sold outright at that point in time. However when it comes to leasing, another value is calculated which is the residual value. Residual Value is the estimate of how much the vehicle will be worth at the end of the lease taking into account depreciation and other factors.
You then make monthly payments which are determined by the difference between the retail price and the residual value. This means that you are not paying the full price of the vehicle which leads to lower monthly payments.
Once your lease period is complete, the vehicle is then returned to the leasing company, and you will have the option of taking out a lease on another vehicle.
Advantages of Leasing a Car
- Monthly repayments will typically be lower than if you acquired an auto loan
- Your vehicle will always be under warranty so any repairs that need done will be carried out by the dealership. These warranties often include regular services and oil changes.
- Maintenance costs will always be lower than buying a car.
- At the end of the lease you don’t need to worry about trading in or selling your car as the dealership will usually take it back.
- You will often not even need a down payment which lowers the barrier to entry for leasing a car making it available to more people.
- People with bad credit history will struggle to be accepted onto auto loans but even with bad credit you can be approved for leasing.
- When you buy a car you have to worry about depreciation and the final value when you decide to sell. You don’t need to worry about this when you lease.
- If you own a business, leasing a car can be used as a business expense saving you even more money and bringing other business benefits.
- You’ll often be in position to lease higher priced and better equipped vehicle than you otherwise might be able to afford if you decided to buy.
Disadvantages of Leasing a Car
- You need a stable source of income because you need to make consistent monthly payments. Losing your job can severely affect your ability to pay your monthly lease amount.
- When you sign your lease, you will be limited to travelling a set number of miles per year. If you go above this, then you will be charged an additional fee.
- You feel the effects of depreciation within your monthly payments rather than the buyer who you sell the car to.
- Occasionally you will be charged a down payment, then you will need to pay this expense each time you renew your lease.
- You must maintain your car to a high level as dealerships can often charge extra for wear and tear damage where it’s clear that you’re not taking care of the vehicle. You essentially need to bring the car back in the same condition that it left the showroom.
- You may have to purchase Gap Insurance, which is the difference between your remaining balance on the vehicle and the ACV of your standard claim settlement.
Advantages of Buying a Car
- When you buy your own vehicle, you have full ownership and do what you please with it.
- There are also no annual mileage restrictions that you will get with leasing so you can rack up as much distance as you need.
- Leasing a car can come with restrictions on how you can customize, however when you buy a car you are free to personalize it to your own taste.
- Once you decide to get a new car, you can trade in your current car which will financially help you purchase your new vehicle.
- If you get a new car loan, you can spread out the cost of the loan repayments over a longer period than you can with leasing.
- When you have completely paid of the cost of the car, the monthly payments will eventually stop, whereas with leasing the payments last for as long as you get the vehicle.
- Buying a car can help you to avoid the common end of lease charges that are common amongst dealerships.
- The longer you drive a certain vehicle, as long as you have a clean record you can usually expect for your insurance costs to decrease over time. This can save you a significant amount of money over the long term.
Disadvantage of Buying a Car
- If purchase a car and will need to make monthly repayments, then you may need to make an initial down payment.
- Vehicles have a habit of depreciating very quickly, so you need to be aware of this if you plan to buy a car.
- If you buy a car there is a risk that it may have a bad history which can lead to problems and issues developing. You will need to make sure you do your research and checks to ensure that the vehicle is in good working condition and have a clean and regular service history.
- Unlike leasing a car, you will be responsible for all the repairs unless the car you buy is still under warranty.
- If you choose to replace your car, you will be responsible for trading or selling it which can take a large amount of time and effort.
- Monthly payments can be higher than when you lease a vehicle.