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March 28, 2014

Leasing vs. Financing - Which is the better option?

 

 

So you’re looking to get into a new vehicle but you’re not sure whether you’re better off leasing or financing (financing - obtaining a purchase loan). Unfortunately there’s not one right answer; it’s really dependent on the specific circumstance. To decide what makes the most sense for you, you must first understand the fundamental differences between leasing and financing, and then weigh the pros and cons of each option.

The one clear advantage of leasing is cash flow – monthly lease payments are typically 30-50% less than monthly finance (or loan) payments. The problem however, is that if you continually lease vehicles, you’ll always have a monthly payment.

It’s easy to understand the basic difference between a purchase loan and a lease using an example.

Let’s say you’re looking to buy a $40,000 Audi A4, but don’t have the cash to pay for it. So you assume a $40,000 loan (whether it be from the bank, or through Audi Finance) and may be charged interest for borrowing that money.

With a lease, instead of borrowing the entire purchase price of the Audi, you’re only borrowing the amount the vehicle is expected to depreciate over the term of the contract, plus interest. Suppose you decide on a 4-year lease, and that four years from now the A4 is predetermined to be worth $20,000 - your then only borrowing $20,000 plus interest, over the 48-month period (the difference between the $40K purchase price of the A4 and its $20K residual value). Therefore, financing $20,000 will give you a lower monthly payment than financing $40,000, even if the lease term is shorter.

Another major difference between these two options is that when you’re leasing you don’t in fact own the vehicle, the financial institution you are leasing the vehicle from (the lessor) does. You’re essentially renting the car for the duration of the lease contract, but at lease-end you’ll have a couple of choices. You can elect to buy-out the vehicle (with cash, or acquire a loan – finance through the bank or the manufacturer), or you can simply return it to the dealership. 

 

Here’s a short list of the benefits and potential drawbacks of leasing.

Benefits of leasing:

  • Cash flow - Again, monthly lease payments are conventionally 30-50% lower than finance/loan payments. You could potentially invest that money you save monthly into a productive asset.

  • Peace of mind – Volkswagens and Audis come with 4 year/80,000km comprehensive warranties, thus your leased vehicle will be covered under the manufacturer’s warranty for the majority (if not for the entire) lease period.

  • “Keep up with the Joneses” – Every 3 or 4 years you’ll be able to get into an updated model, or even an entirely new vehicle. Not saying that this can’t be done if you enter a finance agreement, but with leasing you don’t have to worry about entering a new contract with negative equity (when your vehicle’s market value is less than how much you owe on it).

  • Options at the end of the term – As stated previously, you have the option of simply returning the vehicle, or buying it out. 

Potential Drawbacks

  • Restricted KM allowance – Dependent on the contract, the lessee will be limited to a certain number of kilometres over the period of the lease. Both Volkswagen and Audi offer three km allowance options: 16,000km/year, 20,000km/year and 25,000km/year. However, additional KMs can be purchased up-front if you determine that you’ll be driving more than the original allowance.

  • No equity is built – Unlike financing where you own the vehicle at the end of the contract, at the end of the lease term, you haven’t acquired an asset. If you choose to lease time and time again, you’ll never know what a $0 monthly payment feels like.

  • Accrued charges at lease end – It is expected that the leased vehicle be returned in good working order with “normal wear and tear”. What this exactly means differs from manufacturer to manufacturer, but the lessee could be required to replace the vehicles tires if they’ve incurred extensive wear and obviously you can’t expect to return your leased vehicle with major body damage. With Volkswagen, dents, dings and scratches that are less than 5cm long are permissible, and as long the tires have a tread depth of at least 3.2mm at lease end, you’ll be good to go. With Volkswagen and Audi, you’ll also have the option to purchase a Lease Excess Wear Waiver, which would further protect you from incurring unexpected charges at lease end.

 

One other option I want to quickly touch on is Balloon Financing. It’s a relatively new type of purchase loan that Volkswagen and Audi are now offering customers. Volkswagen Select and Audi Select give clients the option to “balloon” up to 30% of the vehicle’s MSRP. For example, you choose to utilize Volkswagen Select financing on a $30,000 VW Passat, agree to a 5-year term and balloon 30% of the cost (for simplicity let’s leave interest and HST aside). Your first 59 monthly payments would be $356, and you’re final payment would be $9,000. And if you don’t have the cash for the final payment, you can re-finance the outstanding balance. This option is quite attractive to those consumers who prefer to own vs. lease, but still need to keep their monthly payments down.

Desrosiers Automotive Consultants states that about 1/5 of Canadians lease their vehicles, meaning that the majority of the population still opts to either purchase their vehicles with cash or obtain a car loan. Again, for some people it makes more sense to lease, while others would be further ahead financing; it depends on the individual’s priorities. With leasing, you’ll pay a premium over your lifetime in exchange for a lower monthly payment, virtually no concerns about reliability and the freedom of getting into a new vehicle every 3 or 4 years. But if you can commit to properly maintaining your vehicle, and resist the urge to constantly upgrade, you’re probably better off financing (Banerjee, 2011).


Ready to explore your options within the Volkswagen or Audi model range? We’d be more than happy to answer any questions and help you decide whether leasing or financing makes more sense for you.

Click here to contact a Volkswagen Sales Consultant.

Click here to connect with an Audi Brand Specialist.

 

 


Crosby Volkswagen and Crosby Audi proudly serve Kitchener, Waterloo, Cambridge, Guelph and surrounding areas in southern Ontario.

 

 

 

References: 

Banerjee, P. (2011, February 8). Lease or buy a car: what's the better option?. The globe and mail. Retrieved from http://www.theglobeandmail.com/globe-investor/personal-finance/lease-or-buy-a-car-whats-the-better-option/article565403/

Beltrame, J. (2012, March 2). Leasing a car is the worst financial decision for most. The globe and mail. Retrieved from http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/leasing-a-car-is-the-worst-financial-option-for-most/article551390/

 


Posted by:
Taylor Moffitt at 4:18 PM
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Name: Taylor Moffitt
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