Two men shaking hands inside car dealership
Via: House of Cars

Leasing vs. Financing vs. Paying Cash: What Makes Sense in Today’s Economic Environment?

So, you decide to purchase a car after having chosen from the infinite list of options that exist in the market today. Still, you don’t know if you should pay cash, consider financing, or maybe leasing.

Many of us have heard the pros of acquiring a car with cash with things like “I don’t have to worry about a monthly payment,” or “I can own the car outright and have no debt,” and so on.

But today, we will go over points that are perhaps not discussed as often as to why you should pay for your car in cash.

Financing or leasing a car can, in some situations, be an excellent idea, sometimes better than buying a car with cash.

Whether you buy the car in cash, financing, or leasing, each has advantages or disadvantages, according to your needs and budget.

So, let’s analyze the pros and cons of these three options on how to buy a car.

Man inside a new car in dealership showroomVia: Car and Driver

It is not hard to find people online discussing this topic. Many times, financial professionals and amateur forums advocate purchasing a car with cash.

Sometimes you can even hear people proudly tell you that paying with cash is the only smart thing or the best way to do it. Especially with a depreciating asset vehicle, how could you possibly want to go into debt for that?

No car dealer will turn away a cash-paying customer from the auto market standpoint. But for the most part, you are less welcome than someone who wants to lease or finance a car.

Of course, dealers love all paying customers, but they really want people to finance.

This is because buyers who pay cash for their cars, whether through check or borrowing money elsewhere, provide dealers fewer opportunities to make money on a car deal.

Still, historically, leasing hasn’t been the most popular choice in the U.S. As of late 2020, only about 27% of new vehicles were leased instead of purchased.

Between 2019 and Q4 2020, overall auto debt in the U.S. grew by $80 billion to $1.37 trillion—a 6% increase, according to Experian data.

That expansion mirrors the 6% average auto debt growth rate over the past decade.

In other words, despite changes in consumers’ daily travel and commuting habits, the automotive financing market didn’t experience significant disruption like other types of consumer debts.

Paying Cash For A Car

By paying in cash for your car, you can avoid the inconvenience of monthly payments that represent a fixed expense for several months or years. Not to mention the interest that these generate, representing a loss of several thousand dollars over time.

Of course, you should keep in mind that a new car starts to depreciate from the moment it leaves the dealership, so by no means can you consider buying a car an investment. In fact, one big con with paying cash is getting rid of a good amount of money to buy an asset that quickly loses its value.

Still, paying cash allows you to enjoy your new car without worrying about the payments, except for insurance.

Additionally, the car becomes yours, and you will have the title in your hands from the moment you pay for it. This facilitates the sale of the vehicle, unlike when you opt for financing. When you finance a car, the company that grants the credit owns it until you complete all your payments.

So, if you want to sell the car before finalizing the payments, this can cause you trouble and delays.

Pros: Less paperwork. You will not be in debt. You will not pay interest.

Cons: You will have less liquidity in the face of possible emergencies. You will lose investment opportunities. You will decapitalize.

Ideal for: People who have sufficient liquidity plan their finances very well or are not eligible for car loans or other forms of financing.

Handing car keys to another person

Via: Libre Cambio

Financing A Car

Statistics show that most car buyers prefer to purchase their cars through financing. In the U.S., for instance, although the share of new vehicles with financing decreased overall from the first quarter of 2017 to the first quarter of 2021, according to Statista, 81.2 percent of new cars purchased in the United States in the first quarter of 2021 were financed.

In contrast, lease options were found in around one out of four vehicles in the United States in 2021, including cars, with the others being sold outright.

We can say that financing is more popular because you do not need to have a considerable amount of money to acquire a car. In addition, at the end of the stipulated term, the vehicle will become your property, unlike leasing.

In addition to this, you can find attractive financing plans with very low-interest rates, so you would not pay much more than with cash. But, of course, remember that you must have an excellent credit history to find a reasonable low-interest rate.

Paying for a car in installments will also require a down payment, usually between 10 and 20% of the car’s value. This means you would still need cash to buy a vehicle through financing.

Still, it is possible to make this initial payment through a trade-in for your old car as part of the new transaction. But remember that if you want to sell a vehicle before you finish paying for it, the process could be a little more complicated.

Likewise, suppose you want to buy a car while still paying for another. Again, you may find yourself with several limitations along the way, especially if you still owe more than the car is worth.

Pros: It allows you to get a car quickly by replacing the need for liquidity. You can improve your credit history. You know the exact amount you will have to pay each month. You can include in your payments the cost of other expenses such as car insurance.

Cons: If you miss your payments, you will increase your debt and pay even more interest. It is not a suitable scheme if you do not have a fixed income. You get the title of the car until you finish paying for it.

Ideal for: People who have fixed income or use their car for work purposes.

Various vehicles parked outdoors at a car dealership lot

Via: West Auto Sales

Leasing A Car

The leasing option is ideal for those who like to have a new car every couple of years. By paying monthly rent and without a down payment, you take possession of the vehicle to use it as you wish. Then, when the term ends, you do not have to worry about selling it but simply returning it to the leasing company.

In addition to this, the car will always be under warranty and covered for minor damages. But, of course, insuring the vehicle is at your own expense, and most of the time, you will be required to have full coverage.

You must also take excellent care of the car to avoid damage such as scratches or excessive wear that may incur penalties at the end of the leasing contract.

Also, lease payments may be tax-deductible if you use your car at least 50% for work. However, leasing contracts have a limited mileage per year, so this option may not be for you if you use the car a lot.

Remember that you will not have a car to sell at the end of the term, so you will have to start the rental process again for the next model you’re after.

Leasing is a popular way to get into a car without assuming long-term responsibility. Leasing has become so popular among car buyers that dedicated leasing companies, such as Vantage Leasing out of the U.K., have built their businesses on making favorable lease terms accessible. 

Exotic vehicles are often a good option for leasing as it removes the pressure of depreciation for these types of vehicles.

As the global economy evolves, it’s fair to say that more companies like Vantage will thrive as they empower consumers to purchase their preferred vehicles.

Pros: It can be tax-deductible. You can swap the car every couple of years. Lower monthly rent than monthly financing installments.

Cons: Leased cars typically have annual mileage limits. You will never own the vehicle. You will not increase your assets.

Ideal for: People who want to renew their car frequently and business owners.

Salesperson showing a couple various cars on the showroom floor

Via: Car and Driver

Purchasing a car has many meanings personally; it can be realizing a dream, transportation for the family, a luxury, or even an essential work tool.

But regardless of the meaning, purchasing a car is a big step, whether it is your first vehicle, or you just have to have the latest model.

Therefore, before making the final decision, analyze your options and define which purchase method is the one that best suits your financial situation and your needs.