Financing vs. Leasing vs. Paying Cash: What’s the Best Way to Buy a Car?

Car shopping requires a few big decisions. Not only do you need to sort through the hundreds of available models, but you also need to figure out the best way to pay for your new ride. After all, it doesn't do any good if you find the perfect vehicle for your needs, but you can't fit it into your monthly budget.

Thankfully, there are a few payment options available, suitable for a range of financial situations and goals. By carefully exploring all the available options, you can determine the best way to purchase and what will save you the most money. Let's dive into each of the main ways to buy a car: paying cash, financing, and leasing.

Understanding Your Vehicle Purchase Options

If you're wondering whether it's better to buy or lease a car, it's helpful to understand how each option works. Let's discuss some of the key advantages and disadvantages of financing, leasing, and paying for a new vehicle in cash.

Pros and Cons of Financing a New or Used Vehicle

The most popular option when getting a new vehicle is to finance it. With financing, you take out an auto loan to cover the cost of the vehicle, then pay it back in monthly installments over a set period of time. You can secure auto loan financing through a number of locations, including your bank, a credit union, or the dealership.

The biggest benefit of financing a vehicle is that you get the vehicle you want today without having to pay in full. Most people don't have thousands of dollars sitting around that they can instantly use for a large purchase like a vehicle, and even if you do, you'd probably prefer to spend that money elsewhere.

Another huge advantage is that when you're finished making all your payments, the vehicle is yours to keep, unlike with a lease. As long as the car is still in good condition, you can either continue to drive it or choose to sell or trade it in to recoup some of its value.

One of the most significant disadvantages of financing is the interest on your loan. In exchange for fronting the money to purchase your vehicle, the lender will charge you interest on the loan. This means that you'll end up paying more than you borrowed. How much more you pay will depend on the length of the contract and the loan's interest rate, which in turn depends on factors such as your credit score and history. When exploring financing as an option, you should consider the loan rate and how much you're willing to pay in the long term.

Pros and Cons of Leasing a Vehicle

Your next option is to lease the vehicle. Leases are available on the latest models and typically come with the advantage of lower monthly payments than loans. With a lease, you're essentially paying for the amount of value depreciation over a set number of years. For instance, say you decide to lease a vehicle for three years that's worth $20,000 today. It's expected that the vehicle will be worth $14,000 in three years, with an expected depreciation of $6,000. Your monthly payments will be based on that $6,000 amount, divided by 36 months.

Since you're only paying for the depreciated amount, leases are a great way to keep payments low while still enjoying all the perks of driving a brand-new vehicle. When your lease is up, you can decide if you want to get another lease for the latest model, buy out the remaining value in your current vehicle, or explore another option.

The biggest drawback with leases is that, unlike with financing, you don't own the vehicle when the contract term ends. When your lease is up, you'll need to return the vehicle and decide what to do next. You also can't make any major modifications to the car since you're not the owner. Leases also typically come with mileage limits, so if you plan on taking your vehicle on long road trips or have a lengthy daily commute, a lease may not be right for you.

Pros and Cons of Paying Cash For a New or Used Car

Last, there's the simple option of paying cash for your vehicle. When you go to your local dealership, you see the price of the vehicle you want, factor in some additional fees and taxes, and then pay that amount in cash. Paying with cash is a great option if you can afford it, as you'll own the vehicle outright and won't have to worry about loan payments or accumulating interest.

The downside, though, is that this can take a big chunk out of your savings. Even the most affordable new vehicles still cost thousands of dollars, and many of us don't have that much in savings or liquid assets. However, a good compromise is often to choose a combination of cash and either financing or leasing — paying as much cash upfront as you can comfortably afford reduces the total outstanding balance, which means lower monthly payments. Use our payment calculator to learn more about how a down payment can impact your lease or financing plan.

Which Vehicle Purchase Option Is Right for You?

In the end, there's no correct answer in terms of financing versus leasing versus paying cash. It all comes down to your unique situation, preferences, and finances. If you have a large amount of cash available, you might want to pay in cash or use a significant portion to make financing or leasing more tolerable.

For everyone else, financing and leasing are both great options to explore. Start by exploring financing if you like the idea of owning your vehicle after a few years of payments. On the other hand, if your primary goal is low monthly payments now, or if you like always driving the most up-to-date vehicles, start by checking out some of our latest lease offers.

Contact Stivers Ford Today For Answers to Your Auto Financing Questions

If you want to know more about your payment options when purchasing a vehicle, Stivers Ford Waukee of Iowa is here to help. Our finance center specialists would be happy to discuss your particular financial situation with you and detail all your available options. We're confident that we can help you find a payment plan that works for your budget and goals. Contact us today to schedule a visit or stop by at your earliest convenience. We look forward to helping you make your dream car a reality.

Images by OEM