You probably already know that car prices can be way higher and out of reach for many American shoppers. And this is why, like most people in the market for a new car, you might be considering to finance or lease your next car. The truth is that there’s no straight or universal answer as to which option between the two is better.
Choosing whether to get a car loan or lease a new car largely comes down to your individual needs and priorities since both options have their benefits and downsides. That said, here are three things to keep in mind before you finance or lease a car:
- Figure Out How Much You Can Afford
First and foremost, you need to assess your financial situation and determine whether you have enough income to take on a new payment. To reduce your leasing or financing costs consider trading in a car or saving some money for a down payment.
- Check Your Credit Score
The credit requirements for leasing tend to be a little bit more forgiving compared to those for financing a car. However, you’ll still need a credit score that’s high enough (at least 620 or so) to lease a vehicle. It’s, therefore, a good idea to get a copy of your credit report and check your credit score when considering either of the options.
- You May Need a Co-Signer
Whether it’s a car loan or a lease, your credit history is one of the crucial factors that determine whether or not you get a financing deal. If you have absolutely no credit history, the lender or creditor may request that you get a co-signer to assume equal responsibility for the lease agreement or finance contract.
What is a Car Loan (Borrowing)?
When you’re in the market for a new or used car and don’t have the cash to pay for it, a car loan (also known as an auto loan) can help you purchase it. After applying for a car loan, the lender reviews and approves your application based on several factors, then gives you the money to pay for the car.
In return, you agree to pay back the entire loan balance plus any interest and fees you accrue, usually in monthly payments, over a set period of time. Before you apply for a car loan, shop around and compare loan terms and conditions, interest rates, and costs from different lenders. Your goal should be to find the best financing deal for your car. There are several primary benefits of a car loan:
- Car ownership. Purchasing a car with a car loan usually comes with the lender holding the title until you clear the entire loan balance. However, you own the vehicle and they don’t restrict what you can do to it.
- Unlimited use of mileage. There’s a mileage cap to almost every lease agreement you’ll come across. Exceeding the cap would mean paying hefty fines at the end of the lease contract. Buying a car with a car loan, on the other hand, leaves you with as many miles as you want.
- More cash savings in the long-term. With a car loan, you get to own the vehicle as soon as you pay off the loan. This results in more cash savings in the long-term.
- Build up resale or trade-in value. While it’s a good idea to wait until you pay off the loan before you can sell or trade-in your car, you can do so if you wish, as long as you have positive equity.
- No end-of-lease charges. Financing a vehicle with a loan doesn’t attract any leasing related charges. You won’t have to worry about incurring excessive mileage sub-charges or paying for excessive wear and tear as is the case with a lease contract.
On the other hand, there are several downsides of vehicle loans as well. They include:
- Higher Monthly Payments. Financing a vehicle with a car loan is more expensive in the short-term as you’re required to pay higher monthly payments than the lease payments.
- Higher down payment. To get the best car loan terms, you have to make a generous down payment.
- Post-warranty maintenance and repair costs. According to Coach Connection Mobile Auto Body, “If you’re planning to keep the vehicle for years, you’ll be required to pay for any maintenance and repairs costs that come up once the manufacturer’s warranty runs out”.
What is a Car Lease?
Leasing a vehicle is basically renting it from the leasing company for an extended period, usually between 24 to 48 months, at an agreed monthly payment. Usually, you’re just required to pay for the vehicle’s expected depreciation during the term of the lease, plus a rent charge, interest, and fees.
Simply put, you’re paying the company to let you drive the vehicle. And once the lease period comes to an end, you must return it to the leasing company. You may need to determine which one is best for you between a closed-end lease and an open-end lease. Here are some of the benefits of choosing a car lease:
- Lower monthly payments. The fact that you’re paying for the expected depreciation of the vehicle during the lease period, and not the vehicle’s entire cost, means that your monthly payments will be lower than those you’d have to pay with a car loan.
- Trading-in the vehicle is simple. With a lease, trading-in your used car is less stressful. In fact, you don’t have to haggle over its value. The end of one lease usually marks the start of your next new car lease.
- Up-front costs tend to be lower. Many car leases come with lower up-front costs than car loans. In fact, some lease agreements come with zero down payment at signing.
- Worry-free maintenance. Leasing agreements largely cover most of the maintenance and repair costs.
- Maximizing tax deductions. Leasing a car for business purposes would lead to more tax write-off than a car loan. In this case, the Internal Revenue Service (IRS) will allow you to make deductions for the financing and depreciation costs that you’re paying each month to the leasing company.
On the other hand, here are a few of the downsides of leasing a car:
- You don’t assume ownership of the vehicle. Leasing a vehicle is like renting an apartment. The leasing company owns the vehicle and holds its title, which means they can put restrictions on how you can use it. Failure to follow the rules of the lease contract could result in the vehicle being repossessed.
- There’s a mileage limit. Car leases come with a strict mileage cap, usually between 10,000 and 12,000 miles per year. Go over the limit and your lease could get very expensive. You’ll be required to pay anywhere between 15 and 40 for every mile exceeded.
- You always have a vehicle payment. With a car that’s financed with an auto loan, the monthly payments end as soon as the entire loan balance is paid off. This could be anywhere between four and six years. However, with a lease, you’ll need to make a new monthly payment every time you get a new car. This means higher long-term costs.
It’s important that you weigh the pros and cons of automobile leasing versus loaning. Either way, keep in mind that your insurance plan is crucial. For instance, even though you do not “own” your leased car, you’re still responsible for carrying your own insurance policy.
