When it’s time to purchase a new car, it’s a big decision. There are a lot of things to consider, such as buying new or used, how much to save for a down payment, and what type of financing you’d like for your vehicle. It’s important to always weigh your options and carefully plan when you buy a car.
For some, they are able to save and make their vehicle purchase outright, without financing. For most people, however, they’ll need to decide if they’d like to finance or lease their new vehicle. But what are the benefits of one over the other? In this article, we’ll discuss the difference between financing and leasing your car, and the pros and cons that you can expect from them both.
What is Financing?
When you opt to finance your new car, you’re making a commitment to purchase it. In order to do so, you’ll be borrowing money from a bank or financial institution so that you can make your purchase from the car dealership or private seller. Financing a car means you’ll be taking on substantial debt, and you’ll have to make monthly payments towards that debt with the added APR charges tacked on.
What is Leasing?
Vehicle leasing is the most popular option outside of financing. When you decide to lease a vehicle, you’ll typically deal directly through the dealership instead of a financial institution. You’ll make monthly payments towards the car you’re driving, just like when you finance, however at the end of the lease (typically 2-4 years) you’ll turn in the vehicle back to the dealership. This process can be compared to that of a long-term rental. There are some lease arrangements, however, that will allow you to convert the vehicle to a purchase at the end of the agreement.
Pros and Cons of Financing Your Car
Purchasing a vehicle is a large financial commitment, which makes weighing the pros and cons of this method important before you make your final decision. Take a look at these points:
Payments tend to be higher than that of a lease.
You’ll be responsible for all repair costs outside of a warranty.
It can take longer to reach the point where you can trade in for a newer vehicle.
- The vehicle will be yours to customize if you wish. Change the paint, add a spoiler, place your favorite bumper stickers all over the back windshield - the choice is yours.
- You can drive the car for as long as you like, as long as you make your finance payments on time.
- The car will be yours once it’s paid off.
- You can get trade-in value for the car once you decide to purchase a new one.
Pros and Cons of Leasing Your Car
Leasing a vehicle may be the right decision for you financially; However, it’s important to weigh the pros and cons, just as with financing, before you go this route. Here are some things to consider:
- You’ll have a warranty on the vehicle throughout the lease arrangement.
- Your payments will usually be lower than that of a purchased vehicle.
- You can trade your car in for a newer one once the lease is up, typically every 2-4 years.
- The money you pay into your lease is not an investment towards ownership.
- You will be limited on how many miles you can drive the car during the lease.
- You’ll typically need to have a credit score of 700 or higher.
- You’ll need income that’s predictable each month.
- Over the course of the lease, you’ll probably end up paying more for the car than if you had chosen to finance originally.