What Is the Best Option for You: To Lease or Finance?
Getting a new car is an important milestone. Maybe you want a new car because your old one has run its course. Or maybe your life circumstances have changed and your car needs to change along with it. Perhaps your family is bigger now, or maybe the opposite- maybe you don't need such a big car anymore! You could also just want a newer, better car. No matter what the reason, your two main options are leasing a car or financing a car. Leasing a car is when you borrow a car from a dealership for a certain amount of time and miles, and you pay monthly for it, with depreciation considered. Financing a car is when you get a loan from a financial institution to buy the car, which you pay off monthly, but depreciation isn't considered. Both have fees and interest based on your credit score.
What Is Leasing?
Leasing a car is essentially renting a car from a dealership for a certain amount of miles and length of time. Usually, you will be making monthly payments. When the lease ends, you can either return the car or buy it if you want. You usually need a good credit score to lease a new car. People who leased a new car in the third part of 2020 had a credit score averaging 733. Credit scores of 670 and above are considered "good." Paying off your lease payments every month can even raise your score. Leasing might be right for you if you are interested in driving new cars, if you don't want to own your own car, or if you only need a car for a short amount of time.
Closed-end leases means you agree on how much the value of your car will decrease throughout the duration of your lease term. If the car's worth is less than what you agreed on, you won't have to pay anything extra.
Open-end leases don't consider the car's future value. At the end, you might get a refund if the car is worth more than what was expected. But if it is worth less more than what was expected, you may have to pay.
What Is Financing?
Financing a car means a financial institution will lend you money that you need in order to buy a car. To return the favor, you pay back the loan over a certain amount of time along with interest and potentially other fees. You can get a loan from certain car dealerships, online lenders, credit unions, banks, and more. Banks tend to be less expensive than dealerships because dealerships tend to charge higher rates. If you're financing a car, you should shop around for different loans to find the best APR possible and lending terms possible.
According to the State of the Automotive Finance Market report, in the third quarter of the year 2019 the average credit score for a loan for a new car was 718 and for used cars, 662. If your credit isn't great and you're not in a hurry, it's wise to build your credit before you get a loan for your car. Otherwise, you will have fewer options and less favorable rates.
Financing a car is more expensive than buying the car outright because you're also paying for interest, but it makes buying a car affordable if you don't have the cash up front.
Comparing Leasing and Financing
The main difference between financing a car and leasing a car are what you're paying for and your responsibilities towards the car. Let's take a closer look.
- You're not owning the car. You're paying to use it for a certain amount of time. At the end of your lease term, you choose to buy it or return it.
- The down payment of a lease usually includes registration fees, taxes, a down payment, a refundable security deposit, and the payment for the first month.
- Lease payments tend to be lower than financing payments because you are paying for the loss of value in a car over time while loans don't consider depreciation.
- If you wish to end your lease early, you pay something called early termination fees, which are typically the same amount as keeping the whole lease.
- You don't have to worry about selling the vehicle when you're done with it.
- The future value of the car doesn't affect you, but you also don't get equity out of the car.
- You fully own the car. It is yours to keep as long as you'd like, put as many miles as you'd like on it, and you can modify or customize it.
- The down payment for financing includes a down payment, registration fees, taxes, and potentially other fees as well.
- Loan payments for financing tend to be higher than for leasing because they don't consider depreciation.
- You can trade in or sell the car at your will, and the money you've made can be put towards paying off your loan.
- You're in charge of selling or trading in the car when you're done with it.
- Your car will depreciate in its value, but you have equity in it.
The decision to lease a car or to finance a car is a big one. It makes one huge difference: whether the car is yours or not. If you want to own your own car, you should finance it. But this also means being responsible for it in ways that you aren't with leasing. You're also not considering depreciation in your loan, so you may be paying more than what the car is worth. Leasing a car is a good option if you don't want to have to worry about selling it in the end, or if you like to always drive a new car. It's also good if you only need a car for a short amount of time, like if you've moved somewhere temporarily that doesn't have public transportation. It also is cheaper, which is a huge perk. Ultimately, the decision is yours to make, and you should consider the pros and cons carefully.