Tips, Tricks & Trends

Is Leasing a New Car Always Better Than Financing?

When it comes to buying a new car, there is always going to be a toss-up as to whether or not you should lease or finance. No matter how you look at them, cars are depreciating assets, and leasing a car means that you’ll be spending less during the time that you have it whereas financing mainly only works if you keep the car longer than three years. In that case, does that mean that leasing is always better than financing?

Leasing equates to a shorter commitment

Cars depreciate in value the longer that you keep them and rack up the miles and daily-driven battle scars. So it makes sense that you would probably want to keep a new car for the shortest amount of time possible while getting the most use out of it. That’s where leasing tends to make the most sense: You can keep the car for a two or three-year commitment term and then trade it in or walk away.

According to Market Watch, leasing a car offers more flexibility as you can always swap your lease to someone else if you need to get out of it even earlier, or simply sell the car with the possibility of breaking even or possibly making a profit. If you were to finance the car, on the other hand, you would be stuck with a five-year loan and would need to come up with a way to get out of the loan early if you end up owing more than the car is currently worth.

Car Lease
Car Lease | David Paul Morris/Bloomberg

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Leasing requires less money up front

If you’re looking to get into a new car and only have one or two thousand dollars to put as a down payment, then leasing could be the better way to go. Financing a car typically requires a larger down payment to get to an affordable monthly payment since you’re paying for the entire cost of the car.

For example, if you were buying a new Honda Accord for $25,000 but you want a monthly payment of less than $300, and you only had $2,000 to put as a down payment then you would be better off leasing. Why? Because if you put down $2,000, then your monthly payment for a typical finance term of 60 months would be $383.

However, if you were to lease that same car with a 55 percent residual value after a three-year lease term, then you would only be responsible for $11,250 for the entire lease term. Subtract that $2,000 down payment and divide it by 36 months, and you’ll only have to pay $256 per month drive that same new car, so that means you can likely get away with putting only $1,000 down instead, or perhaps no money down if your credit is good enough to do so.

(Note: this is an over-simplified way of calculating a lease and is for demonstration purposes only. Your actual lease structure may vary.)

A man inspects a car inside a dealership
A man looks at the sticker price of a new Chevrolet | Tim Boyle/Getty Images

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Leasing can protect against depreciation

No, leasing a car doesn’t mean that your car will be impervious to depreciation, but it can help later on if the market ends up dropping. Considering you will likely lease a car for three years, you will never really know how much it will be worth when that lease contract is up. Luckily, when you lease a car, the manufacturer will predict the car’s residual value (how much the car is worth at the end of the contract) based on the current market conditions.

If the car ends up being worth more at the end of the lease term, you can buy it out and make use of the extra value, or sell the car and make a profit. But if the car ends up being worth less than the residual value, then you can trade it in for another one or turn it back in and walk away. If you finance that same car and wanted to get out of it in three years, then you would be stuck with the remainder of the loan and will more than likely owe more than it’s worth.

KAZAN, RUSSIA – JUNE 7, 2018: New Lada Vesta Cross cars during the sales launch at a LADA car dealership of KAN Avto Group of Companies, a partner of AvtoVAZ. Yegor Aleyev/TASS (Photo by Yegor AleyevTASS via Getty Images)

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Leasing has more benefits

Ultimately, leasing a new car has so much more flexibility and benefits in the long run, especially in uncertain times like we’re living in now. You can keep money in your pocket now since you don’t have to put as much money down; you can get out of a lease early if needed, and you’re technically only paying off the depreciation during the lease term. With those three benefits alone, we would say that leasing a new car is technically better than financing.