Key Takeaways:
- Car leasing is more expensive in the long run than buying a car outright with cash or a loan.
- Leasing is an excellent option if you need a new car every few years but don’t have the cash to buy one outright.
- Car financing is a good option when you want to build your equity in the vehicle while paying monthly installments.
- Many online leases vs. loan calculators can help you compare the total cost of each option when you input relevant information.
Making the decision to lease or finance your car can be significant. You need to consider your budget, what you need and want, and what will work best for you in the long term. Many details go into both options, and it can be confusing to figure them out. But don’t worry, we’re here to help! Learn more about leasing and car financing by exploring the key differences between each!
Leasing or Car financing: The Key Differences
1. Ownership Status
Leasing a car means paying to use it for a specific period. Once the lease term ends, you have to either return the vehicle or purchase it outright.
You own the vehicle outright with financing, so you can do whatever customization or modifications you want without getting approval.
2. Down Payments
A lease typically requires the first month’s payment, a refundable security deposit, a down payment, taxes, registration fees, and possibly other expenses.
With finance, you’ll also have to make a down payment. The size of your down payment will depend on the purchase price of the car, as well as your credit score and other factors.
3. Monthly Payments
With leasing, your monthly payments will be lower because you only pay for the vehicle’s depreciation plus interest charges, taxes, and fees.
With car financing, your monthly payments will be higher because you’re paying off the entire purchase price of the car plus interest charges, taxes, and fees.
4. Mileage Restrictions
Most leases have mileage restrictions, usually between 12,000 and 15,000 miles per year. You’ll need to pay for extra miles if you cross the limit.
With car financing, there are no mileage restrictions. It depends on you how much you want to drive your car.
5. End Of Term Options
At the end of your lease term, you will have three options:
- buy the car outright
- return the car and walk away
- lease or finance another vehicle
Read: Should you buy out your leased car?
When your car financing period ends, you own the car right away! Now you have the option to:
- sell the car
- keep the car
- trade in your car
6. Early Termination
If you need to get out of your lease early, you will likely have to pay a hefty fee.
You can sell or trade the car anytime if you have a loan.
7. Depreciation Cost
The car’s future value does not affect you, but you do not gain any equity in it.
With this finance option, the car will lose some value over time, but the equity (the difference between what you owe & the car’s resale value) is yours to use as you please.
8. Maintenance And Repairs
With a lease, you are only responsible for routine maintenance, such as oil changes and tire rotations. If there’s significant damage to the car, you are only responsible for the deductible on your lease contract.
With a loan, you are responsible for all maintenance and repairs on the car. This can be expensive if you have to replace major engine parts.
What Is Gap Insurance?
If you get into an accident and the car is totaled, your insurance will only pay for the car’s market value. You are responsible for the difference if you owe more than the car is worth. Gap insurance covers this difference and is recommended if you lease or finance a new car.
Lease Vs. Loan Calculator
Many online leases vs. loan calculators can help you compare the total cost of each option. Be sure to input all the relevant information, such as the price of the car, the length of the lease or loan, your down payment, interest rate, and annual mileage.
What Role Does Your Credit Score Play When Leasing or Financing a Car?
Your credit score significantly influences your ability to lease or finance a car. A good credit score will give you access to the best interest rates and terms, while a bad credit score can make getting approved for a loan challenging.
If you get approved for car financing, you’ll likely end up paying much more in interest than someone with good credit. Most lenders view borrowers with bad credit as higher risk, which means they’re more likely to default on their loans. So, they need to offset the risk with high interest!
The Bottom Line
Leasing a car has its advantages and disadvantages. It’s crucial to understand all the factors involved before making a decision. Use a lease vs. loan calculator to compare the total cost of each option and make your choice according to your individual needs and budget!
Leasing might be the best option if you want lower monthly payments, don’t mind driving a car for a few years and turning it in when the lease expires. Financing is typically the better choice if you keep your vehicle for a long time, you’re comfortable with higher monthly payments, and you don’t want the hassle of turning in your car at the end of the lease term.
Cutter Buick GMC serving Waipahu, HI, is your go-to dealership for everything you need to know about car financing. We understand that budget and credit are essential considerations when looking to lease or finance a car. We’ll work with you to get the best deal possible, tailoring a financing option from our options to suit your individual needs.
Apply for financing at our dealership now!
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