Financing vs. Leasing a New Volkswagen

Most buyers drive out with a new car in one of two ways. Financing the purchase is the most common, with leasing being the other option. Financing is familiar to all of us. We finance every time they use a credit card and pay it off over time. A car loan is more complex than that, but the fundamentals are the same. Leasing is more prevalent in the business world, where office space, office equipment, and fleet vehicles, if applicable, are all likely to be leased. Most people, however, have likely never leased anything but an apartment. Is leasing a car a good alternative to purchasing? Volkswagen of Duluth will take you through the pros and cons of both options.

Auto Financing Basics

Financing a car starts with determining the cash you have available for a down payment and what you feel comfortable paying every month. Generally, car loans require between 10% to 20% of the purchase price for a down payment. A trade-in vehicle can be part of the down payment. 

You choose your lender, which can be your personal bank, another bank if they have better terms, a credit union if you belong to one, or the dealer’s financial institution, which in our case is Volkswagen Financial Services. Financing through the dealer can be a good option, particularly when the manufacturer provides incentives. Often, the best incentives (cashback or low APR, among others) will be contingent on financing through the dealer. Nevertheless, it is a good idea to research all your financing options before shopping.

Your monthly payment will depend on the amount borrowed, the loan term (24 months, 36 months, etc.), and the interest rate. Each institution can have its own calculations for the interest rate. Still, they are all required to translate them to the Annual Purchase Rate (APR), a standard method of calculation that allows you to compare loan costs from multiple sources accurately.

For banks and credit unions, the APR will primarily be based on the national prime lending rate – which is determined by the Federal Reserve and fluctuates with the state of the economy. Your own credit score comes into play as well. Lenders will charge a lower interest for lower-risk borrowers and vice-versa. 

Dealer financing will be influenced by the same, but manufacturer incentives can play a part. If a manufacturer determines they have too much inventory of a particular model, they may have their finance company lower the APR on the model regardless of the other factors.

With each payment, you pay down the cost of the car, known as the principal, and the interest, which is the cost of the loan. What you pay toward the principal reduces what you owe on the car. Once the loan is paid off, you are the car’s legal owner. You can keep the car, sell it, or give it away if you want. You can sell the car while you still have the loan, but money from the sale will first go to paying off the loan. 

Auto Leasing Basics

Aside from some nominal fees and taxes, leasing often requires little or no down payment, leaving you with just the monthly payments for the lease length, which usually varies between two to four years. However, any down payment you can provide, including a trade-in vehicle, will lower the lease’s monthly payment.

At the lease end, you must return the car to the dealership. Most people at this point lease another new car, but they can buy back their leased car. This will likely involve financing with a used car loan unless they have been saving up.

A leased car is technically not owned by you, so there are usually terms governing the car’s use. The most significant rules involve a maximum amount of accumulated mileage and the allowable level of wear and tear on the car by the lease end. The lease was structured based on the car having a particular value at the lease end, so these restrictions are in place to protect the vehicle’s value. Thus, you will pay fees if the miles and wear and tear are excessive. In some cases, mileage limits and other lease restrictions can be negotiated in advance. 

Leasing can have some tax advantages if you use your car for business. Because these tax deductions depend highly on specific business circumstances, you should discuss this with your employer or accountant to determine how the tax advantages apply to you.

Financing Pros and Cons

Pros

The pros of financing mostly revolve around the fact that you own the car. You have the freedom to do what you want with it. You can drive it as far as you want, as hard as you want. You can sell it when you want and customize it as you wish. If it gets damaged, how to fix it is up to you. As long as you keep up with the payments, your lender doesn’t care. And, once the loan ends, you can simply keep it, possibly saving the payment money for your next down payment along with the trade-in of your car. 

Cons

• • Higher upfront costs. You need to have money saved up for the down payment, and most likely, your financed payments will be higher than lease payments for the same car. 
  • Greater complexity: If you arrange your financing separately from the dealer, your car purchase can be a multi-step process, whereas leasing is usually a single-step process at the dealership. 
  • Maintenance costs: You are responsible for most, if not all, maintenance costs, so you need to budget for these costs as part of your vehicle ownership. 
  • Frequently replacing cars can get expensive. New cars depreciate quickly, creating a significant gap between your current car and the next one.

• Being upside down on the value of your car. This refers to a possible situation where you owe more than the car is worth. It is more likely to happen on long-term loans and/or loans with a very low down payment, either of which can result in the early depreciation being more significant than what you have paid for the car thus far.

Leasing Pros and Cons

Pros

• No or significantly lower down payment: You can lease a car with less money upfront. However, having money for a down payment will reduce your monthly payment.
• Generally, leasing will get you a more expensive car for the same monthly payment.
• No-cost maintenance: Most leased vehicles have a paid maintenance arrangement with the dealer so that you won’t be paying for maintenance during the leasing period. The warranty usually covers most of the cost if something unexpected goes wrong.
• Continually able to drive a new or late-model vehicle: Leasing makes it easy to continually hop from a 2 – 3-year-old vehicle to a new one without directly incurring depreciation costs.

Cons

• Mileage restrictions: Allowed mileage often ranges from 10,000 miles to 15,000 miles per year. Fees can often be between 10 and 25 cents per mile over the limit. This could be a concern if you are unsure how much you will be driving during the lease term.
• Wear and tear fees: Often, dents, scratches, dings, scrapes, or interior stains can be difficult to control, and what is allowable for the course of the lease term may be difficult to quantify specifically. You may be charged for what the lease provider considers excessive wear and tear at the lease end.
• Eternal car payment: Your car is never paid off. As long as you lease, the payments simply continue and often increase with the increasing cost of new vehicles. 
• The lease dictates the timing of your next car. If you see a car you want coming out in six months, but your lease is up next month, you won’t be able to wait before securing your next vehicle. 
• Ending a lease early usually results in high fines: If things change and you can’t afford your payments or don’t need the car, ending the lease early can be costly.

About 86% of new car shoppers choose to finance, though leasing once rose as high as one-third of all new vehicle transactions. The F&I professionals at the Volkswagen of Duluth Finance Center are well-trained in both options, but deciding what is best for you ultimately depends on your preferences. In general, leasing is your best bet if you enjoy always having the newest model and features. On the other hand, if you value freedom in what you want to do with your car, financing may be the better route.