Is it better to finance a car or rent it? How to decide.

If you are looking for a new car, you may be considering renting or financing. The main difference is basically rent versus buying. Monthly lease payments comply with a long-term lease, while monthly financing (loan) payments are for the eventual property.

Leases are generally shorter than loan terms and lease payments are shorter than loan terms. Both loan plans have pros and cons, so how do you know which one is best for your long-term financial goals? To help you answer this question, here are five things to keep in mind before making the decision to rent or finance.

1. Innovation or equity?

The main downside of leasing to the average person is that you have nothing to show for years of payments at the end of the contract. Rent is rent. Return the car at the end of the rental period, leave the keys and leave.

On the other hand, the advantage of renting is driving a new car every two or three years. When you rent, you always have a state-of-the-art vehicle with the latest technology, innovation and new car warranty protection.

When you finance a car with a traditional car loan, you gradually build capital on that car. Finally, it will be the owner when you make the final monthly payment. So these years of payments lead to something of value. In short, you have something that you can touch and that is yours.

At the end of the loan period, you can drive this car until the wheels fall off. Or, at some point, you could exchange it for the purchase of another vehicle. With rent, you have nothing. In the long run, using a loan to buy a car makes more financial sense for the average consumer.

2. Payments

Especially for consumers on a tight budget, it can be difficult to adjust a monthly payment for a new car to other bills. Lease payments are always lower than loan payments. This is often true even if the term of the loan is twice the term of the lease so that you only pay the amortization of the car during the rental. That is, you only pay for the value that the vehicle loses when you own it.

Remember that renting is renting and financing is buying. Pay off the full value of the car when it is new with a loan.

For example, suppose you choose a Nissan Sentra S 2022 for $ 20,835, including destination charges. If you took Nissan NSANY,
-1.27%
financing for a 36-month loan with no down payment, the payment would be $ 596 per month. If you choose the 36-month Nissan lease with $ 398 in advance, the monthly payment would be $ 348. Even if you financed for 60 months, the $ 384 monthly payment would exceed the 36-month lease.

Without a doubt, the monthly lease payments are lower than the monthly payments for self-financed loans.

To verify: Top 10 hybrids for less than $ 30,000

3. Additional costs

Again, the lease is a rent and you have to pay various fees when you return the vehicle. At the end of the lease, you must return the car in good condition beyond normal wear and tear. This time in a parking lot or the stain of chocolate milk from the kids in the back seat will probably cost you at the end of the lease. The distributor performs a purely subjective inspection. Anything can happen.

Each lease also has an annual mileage limit. Agree to cover a limited number of miles per year. For the Sentra example above, this limit is 12,000 miles per year or 36,000 miles for the three-year lease. For every 36,000 miles you drive, you’ll pay a $ 0.15 penalty. For example, if you return your Sentra after three years with 38,000 miles, you will pay an excess of 2,000 miles. That equates to $ 300. The excess penalty per mile can be two to three times higher per mile, depending on your lease.

When you successfully complete a traditional loan, you owe nothing. No matter the mileage or condition of the car, the vehicle is yours, free and clear.

Financing has the advantage here because, unlike renting, you will not have to worry about incurring additional fees at the end of the loan.

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4. Flexibility

A lease paralyzes the tenant who wants to customize the vehicle or leave the contract early. The basic agreement of any rental is simple: you will return the car in the same condition in which it left the showroom at the end of the contract. In other words, you can’t add streaks, custom wheels, upgrade your sound system, or any of the hundreds of other things people do to personalize their journey. Modifying the vehicle will cost you money at the end of the rental.

When financing with a car loan, you can dispose of the car when and by any method you choose if you pay the lender the outstanding balance of the loan. You can market it, sell it, or give it away. However, you must settle the balance with the lender. Getting out of a lease is much more complicated and often expensive. Each car rental almost always carries a penalty for early cancellation. This can be as much as the remaining monthly payments or other punitive amount.

Read: If your car rental is about to expire, buying it is probably a smart move.

While there are a number of online lease brokers like SwapALease that match tenants who want to get out of a lease with people who are willing to hire it, there is always a cost. In addition, not all contracts allow you to transfer a lease to another party.

5. The long term

Although in a way it is a reminder of the question “Innovation or equity? Please note that the value you get from a vehicle that you own may continue long after the loan is completed. Whatever value you receive from a lease ends when it expires. In the case of a two-year lease, the value stops at two years, three years for a three-year lease, and so on.

When you finance a car with a loan, you can continue driving for years after making the last payment. It continues to be valuable every additional year you drive it. You can even pass it on to a family member who will continue to enjoy its value.

See also: 12 hybrid and petrol cars that get the best mileage

But…

So far, our advice is aimed at the average consumer. You can stay out of this category and the rent makes sense under certain conditions.

  • Leasing can benefit people or businesses that use a vehicle as a tax deduction. A rented vehicle may result in a larger deduction due to the structure of the rental. Your tax professional can fill in the data for you.

  • There are times when you know that you will only need one car for a limited time. Maybe you have a long-term temporary job across the country that requires you to be there two weeks a month. It may make more sense to hire a two-year or short-term lease than to bother renting a car for two weeks each month.

  • Some drivers want a new car every two years without having to sell or change the current car. Leasing streamlines the layout of your current vehicle and also guarantees the value of that vehicle at the end of the contract. Your lease indicates the value that the leasing company gives to this car at the end of the lease. This is called “residual”. If the vehicle is worth more than the residual at the end of the rental, you have other options to take advantage of it. However, if the market value of the car at the end of the lease is less than the residual value, you are out of the woods. Return the car and rent another one.

This story originally took place Autotrader.com.

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