Leasing vs Buying: Key Differences Between Car Leases and Loans
When getting a new car, two popular options are leasing a vehicle or financing the purchase with an auto loan. But what are the key differences between car leases and loans?
In this guide, we’ll compare the pros and cons of leasing versus financing to help you decide which is the better financial move for your situation.
How Car Leases Work
With a lease, you essentially rent the vehicle from a leasing company for a fixed period of time, usually 2-4 years. Here are some key features of car leases:
- Make monthly payments to use the car temporarily
- No ownership - the leasing company owns the vehicle
- Lower monthly payments compared to financing
- Restrictions on mileage and condition
- Option to purchase the car or return it at lease end
- Ongoing costs for insurance, fees, and maintenance
Leasing advantages include lower payments on newer cars and easy upgrades to a new car when the lease ends. But there are also limitations to consider.
Auto Loan Purchase Financing
Financing with an auto loan means you borrow money to buy the car outright. Here's an overview of how financing works:
- Take out a loan for the purchase price minus any down payment
- Make monthly payments on the loan amount plus interest
- Gain ownership once loan is fully repaid
- Can sell or trade in the car anytime
- Responsible for ongoing costs of insurance, maintenance, etc.
- Loan term typically 4-6 years
- Build equity as the loan balance goes down
Financing is beneficial if you want to own the car, customize it, or sell it later. Interest charges increase the total cost but your equity also builds over time.
Main Differences Summarized
Here is a comparison table outlining the key differences between car leases and financing:
| Leasing | Financing |
|---|---|
| Do not own vehicle | Gain ownership |
| Lower monthly payments | Higher monthly payments |
| Limits on mileage and condition | Freedom to customize and drive |
| Return car at lease end | Sell or trade car anytime |
| Minimal down payment | Typically higher down payment |
| No interest paid | Pay interest on loan |
| No equity | Build equity as loan is paid |
These major differences influence whether leasing or financing is the better option. Weigh your priorities in terms of ownership, costs, mileage needs, and customization when deciding.
Cost Comparison
To compare costs, let's look at an example scenario with estimated payments:
Vehicle MSRP: $30,000 Lease: $250/month for 3 years Financing: $405/month for 5 years at 4% APR
- Leasing Cost = $250 x 36 months = $9,000
- Financing Cost = $405 x 60 months = $24,300
In this example, leasing has a significantly lower total cost. But once the lease ends, you would need to return the car or finance buying it from the leaser. With financing, you eventually own the car after paying the loan.
When Leasing Makes Sense
Here are some situations when leasing is typically the better financial option:
- Want a new car every few years
- Drive less than 15,000 miles per year
- Prefer lower monthly payments
- Like having a car under warranty
- Don’t need to customize or modify the car
- Want lower insurance premiums and registration fees
- Appreciate easy transition to a new car when lease ends
Look at leasing if you prioritize having affordable payments on new cars regularly and staying under mileage limits.
When Financing is Better
Here are scenarios where financing the car purchase is generally the smarter move:
- Plan to keep the car long term (beyond 4-5 years)
- Drive more than 15,000 miles per year
- Want to build equity in the car over time
- Like to modify, customize or sell the car later
- Don't want to worry about mileage restrictions and wear-and-tear fees
- Prefer fixed monthly payments that build ownership
Financing makes more sense if you want to keep the car with no strings attached. You build equity and take full ownership once the loan is paid off.
FAQs
Here are answers to some common questions about leasing versus financing cars:
Which is cheaper per month, leasing or financing?
Leasing typically has lower monthly payments than financing since you are only paying for the vehicle's depreciation.
What happens when my lease ends?
At lease end, you either return the car, buy it, or lease another vehicle. Make sure you understand all options in your contract.
What credit score is needed to lease?
Most leasing companies want to see a credit score of at least 700-720. Requirements may be slightly lower than financing a purchase.
Are there mileage limits and fees for financed cars?
No, with financing you can drive as many miles as you want without penalties since you own the vehicle.
Can I end my car loan early to upgrade?
Yes, you can pay off your auto loan early or trade in the financed car to upgrade at any time.
Analyze both leasing and financing options when getting a car. Compare total costs and ownership benefits to select the right method for your situation.
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