What's the Difference Between Financing and Leasing a Car?

What’s the Difference Between Financing and Leasing a Car?

When it comes to acquiring a new set of wheels, consumers have two primary options: financing or leasing. Both avenues offer their own set of advantages and disadvantages, and making the right choice largely depends on individual preferences, financial situations, and driving habits. In this post, we will explore the differences between financing and leasing a car and take a look at consumer preferences and trends based on the available data.

Financing a Car

Buying a car is the more traditional way of acquiring a vehicle, and it involves outright ownership. Here are some key points to consider when buying a car:

  1. Ownership: When you buy a car, you become the owner of the vehicle. You have complete control over it, and you can customize or modify it as you see fit. The car is an asset that belongs to you, and you can keep it for as long as you desire.
  2. Loan or Cash Payment: Most people don’t have the financial means to pay for a car in cash, so they opt for a car loan. This involves making a down payment and then paying off the remaining balance in monthly installments with interest. Once the loan is fully paid, the car is entirely yours.
  3. Depreciation: One of the significant drawbacks of buying a car is depreciation. New cars lose value rapidly, often up to 20-30% in the first year. This means that the car’s value decreases over time, and you’ll have an asset that’s worth less than what you paid for it.
  4. Maintenance and Repairs: As the owner, you’re responsible for all maintenance and repair costs. While you can choose where to service your vehicle, these expenses can add up over time, especially as the car gets older.
  5. Mileage and Usage: There are no mileage restrictions when you own a car. You can drive as much as you want without worrying about extra fees. This is particularly beneficial for people with long commutes or those who enjoy road trips.
  6. Customization: If you like to personalize your vehicle with aftermarket modifications, buying is the way to go. You have the freedom to make changes to your car’s appearance and performance.
  7. Long-Term Investment: Buying a car is often seen as a long-term investment. Once you pay off the loan, you can drive the car for several years without monthly payments, potentially saving you money in the long run.

Leasing a Car

Leasing a car is a bit different from buying, as it’s essentially a long-term rental agreement. Here are the key aspects of leasing a car:

  1. Ownership: When you lease a car, you do not own it. Instead, you’re essentially renting it for a predetermined period, typically 2-3 years. At the end of the lease term, you have the option to return the vehicle, purchase it at a predetermined price (the residual value), or lease a new car.
  2. Monthly Payments: Lease payments are generally lower than monthly loan payments for the same car. This is because you’re only paying for the vehicle’s depreciation during the lease term, not its full value.
  3. Depreciation: Since you’re not responsible for the car’s long-term depreciation, leasing can be advantageous for those who like driving newer vehicles with the latest features. You’re not affected by the car’s resale value.
  4. Mileage Restrictions: Lease agreements typically come with mileage restrictions, often ranging from 10,000 to 15,000 miles per year. If you exceed the agreed-upon mileage, you’ll be charged for each additional mile, which can add up quickly.
  5. Maintenance and Repairs: Most lease agreements require you to maintain the car according to the manufacturer’s recommendations. You’re responsible for any excess wear and tear, which can include dents, scratches, or other damages beyond normal wear.
  6. Customization: When you lease a car, you’re usually not allowed to make significant modifications to it. You must return the vehicle in its original condition at the end of the lease term.
  7. Ownership Costs: While leasing can be more affordable in terms of monthly payments, there maybe leasing costs your are unaware of before reading the contract. Such costs may include early termination fees and a lease disposition fee , it’s worth noting that you won’t have an asset to show for your payments at the end of the lease unless you buy the car at the end of the lease.

Making the Decision

Now that we’ve outlined the key differences between buying and leasing, how do you decide which option is right for you? Here are some factors to consider:

  • Budget: Your budget plays a significant role in your decision. If you have limited funds for a down payment and prefer lower monthly payments, leasing might be more attractive. On the other hand, if you can afford a down payment and want to build equity in a vehicle, financing might be a better fit.
  • Driving Habits: Consider how much you drive and your typical driving habits. If you have a long commute or enjoy frequent road trips, financing a car with no mileage restrictions might be more practical. Leasing is ideal for those with shorter commutes and predictable mileage.
  • Desire for Ownership: Some people find comfort in owning their vehicles and having the freedom to customize them as they wish. If you want to make the car truly yours and plan to keep it for many years, buying is the way to go.
  • Newness and Features: If you enjoy driving the latest models with advanced technology and features, leasing allows you to upgrade to a new car every few years. Buying may mean you stick with the same vehicle for a more extended period.
  • Long-Term vs. Short-Term Commitment: Consider how long you want to commit to a vehicle. Leasing is typically a shorter-term commitment, while buying may mean keeping a car for many years.
  • Financial Goals: Think about your long-term financial goals. Buying a car can be seen as an investment in an asset, while leasing is an ongoing expense with no equity buildup.
  • Resale Value: If you’re concerned about the car’s future resale value, keep in mind that leasing removes this risk from your plate. The car’s depreciation is the leasing company’s concern.

Consumer Preferences and Trends

Percentage of Vehicles with Financing

Data from Experian reveals that the percentage of vehicles with financing has been consistently high, especially for new cars. In 2021, 87.2% of new cars and 40.1% of used cars were financed. This indicates that the majority of consumers prefer to spread the cost of their vehicle over time, whether it’s a new or used car.

However, there has been a slight decline in the percentage of new cars financed from 2021 to 2023 (87.2% to 79.7%). This could be due to various factors such as economic conditions, changing consumer preferences, or shifts in the availability of financing options.

New vs. Used Percentage of Financing

Interestingly, the data also shows that a significant percentage of used cars are financed. In 2021, 58.7% of used cars were financed, and this percentage increased to 63.0% in 2022 before slightly decreasing to 59.3% in 2023. This suggests that consumers are willing to finance both new and used cars, although the preference for financing used cars seems to be increasing.

Percentage of All New Vehicles That Are Leased

Leasing is another popular option among consumers, with 27.7% of all new vehicles being leased in 2021. However, this percentage decreased to 19.9% in 2022 before rebounding to 21.3% in 2023. Despite the fluctuations, leasing remains a significant choice for those who want to drive a new car without the long-term commitment of ownership.

Used Vehicle Percentage of the Total Lease Market

While new vehicles dominate the lease market, the data shows that there is a small but noticeable percentage of used vehicles being leased. In 2021, 9.01% of the total lease market consisted of used vehicles. This percentage increased to 11.0% in 2022 but then decreased to 8.54% in 2023. This suggests that fewer consumers are considering leasing used cars as a viable option.

Wrapping It Up

The choice between financing or leasing a car ultimately depends on your personal preferences, financial situation, and driving habits. Financing offers long-term ownership, customization options, and potential cost savings in the long run. On the other hand, leasing provides lower monthly payments, the ability to drive a new car more frequently, and simplified end-of-lease processes.

Based on the Experian data, it’s clear that financing is the most popular choice for both new and used cars, and leasing remains a smaller part of the automotive market. Consumer preferences may shift over time due to economic factors, changes in financing options, and evolving attitudes toward car ownership. As the automotive industry continues to evolve, it’s essential for consumers to carefully consider their needs and weigh the pros and cons of both buying and leasing before making a decision.

AutoByPayment.com offers accurate estimates of new and used car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.

Leave a Reply

Your email address will not be published. Required fields are marked *