Should I Lease or Finance a Car?

Current Team | March 29, 2022

Leasing or financing a car are two similar ways to go about paying to drive a car. They are also different in key ways, namely in the ownership and long-term use of the car.

The Difference Between Leasing and Financing

Is it better to lease or finance a car?

When you lease a car, you do not own it. You pay to use the car for a set period of time and when that time is up, you have the choice of either returning the car or buying it (for less than you would have if you had paid cash up front).

When you finance a car, you legally own it and can drive it as you like, for however long you want. But in terms of paying for the car, you have to borrow money from your bank or other financial institution, like a credit union or finance company. You agree to pay the amount that is financed, plus a charge on top of that. When you’re ready to buy the car, you use this amount to pay for it.

Direct Lending

This is a process known as direct lending, which also allows you to get your credit terms in advance. You’ll find out the annual percentage rate of the loan, how many months you’ll have to pay it, and the maximum amount you are allowed to borrow.

This information can help you with your dealership negotiations. It can also help you comparison shop since once you have your pre-approval, you can ask around to get the best purchase and financing deals.

Dealership Financing

The other form of financing is known as dealership financing, where you apply for financing through the same dealership that’s selling you the car. You buy the car and you contractually agree to pay, over a set period of time, the amount that is financed, plus the usual finance charges on top of that. The dealer will then sell the contract to a financial institution. They are responsible for actually servicing the account and accepting your payments.

You can get a number of financing options through dealership financing because dealers have relationships with different banks and financial institutions. However, dealerships will likely offer you deals that benefit them more than you, so you should be careful about what contracts the dealership suggests you sign.

There are also special programs, like low-interest deals, a larger down payment, or shorter contract lengths that can come from the dealership. These programs are typically only available to buyers who have good credit scores, so make sure you qualify before applying.

Leasing a Car

On the other hand, there is leasing a car. You pay for the right to use the car for a set amount of time and sometimes for a set number of miles.

Leasing is not buying a car. The monthly payments you make on a lease tend to be lower than the monthly finance payments even if you bought the same car.

When you lease a car, you’re paying to drive the car, not to have ownership of it. So, you’re also paying for the car’s expected loss of value (its depreciation) — everything from tire wear and engine wear to bumps and scratches — while the lease is still active. Additionally, there are taxes, fees, and a rental charge.

Not all lease agreements let you buy the car when the lease is up. You may still have to return the car when the lease is over.

Knowing Your Lease Terms

Should you lease a car? That will depend on how much you drive. Most leases allow you to drive 15,000 miles or less. You can try for a higher limit, but that will also make your monthly lease payment higher. This is because the car depreciates in value for as long as there is still a lease. You can drive over the annual mileage limit, but you will likely be charged an additional fee for this when you return the car.

You should also consider all of the terms of the lease because you are directly responsible for any missing or damaged equipment as well as for the general state of the car. You’ll have to service the car regularly and pay for it yourself. You’ll have to purchase insurance that is in line with the standards set by the leasing company. Any violation of these policies might mean more fees when the lease is up.

You have the option of ending the lease early, but there will likely be an early termination charge, and those are usually hefty.

So, Should You Lease or Finance a Car?

It depends on your current financial situation and whether you expect that to change. If you finance a car, you are paying more every month, but you own the car — that can give you some peace of mind at the cost of some financial stability.

Leasing the car offers you lower monthly payments and gives you the option of driving a car that might be more expensive than one you would normally afford. But a lease might put you in a very long cycle of payments, and that might come back to hurt you if you have other financial commitments.

It is ultimately a personal finance decision that only you can make. Before you decide, be sure to create a budget and map out a financial plan that can help lead you to the best decision for your life.