While there are different pros and cons to each car-buying option, it’s important to consider all the differences between a car loan and a car lease before deciding which one to go with. Here are some ways in which a car loan is different from a car lease—and why you might want to choose one over the other for your next vehicle purchase.
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Advantages of Buying a Car with a Loan
The big advantage of buying with a loan is that you’re paying for your vehicle in regular installments. This means you’ll never be in danger of missing payments or having your vehicle repossessed if you lose your job or another major financial crisis occurs.
If you want to own your vehicle, it’s probably better to buy with a loan so that you can build equity. When you drive off with a brand-new leased vehicle, for example, you’re still paying for it even though you don’t technically own it yet. This means when it comes time to sell or trade in your vehicle, there may be less value in it than if you had bought one through financing.
Disadvantages of Buying a Car with a Loan
Interest rates for vehicle loans are often higher than rates for other types of debt, such as mortgages or personal loans. Also, you’ll typically be required to pay a deposit that’s equivalent to one or two monthly payments.
Advantages of Leasing a Car
You don’t have to come up with hard cash upfront. Leasing gives you more flexibility than buying a car on your own, as you won’t need to make payments every month or worry about selling it after only two years. And there are no restrictions on how much you drive, as long as you adhere to mileage limits.
If you change jobs or relocate frequently, leasing is a smart option because you won’t be penalized for moving too far away from where you leased your vehicle. All these benefits aside, some people still say that leasing is not worth it because they can get just as good of deals if they bought their cars outright. Also, they still get to keep most of their money when they trade them in down the road.
Disadvantages of Leasing a Car
If you don’t drive more than 12,000 miles per year, leasing may not be worth it because those mileage fees add up. According to Lantern by SoFi, you also lose any money you put down if you opt for leasing. Some leases have negative equity periods in which you pay extra if your car is worth less than your original down payment. In that case, you should consider auto refinancing.
Which One is Better Suited for You?
If you have a bad credit score, a bad or no credit history, or have not been in the country for a long time; leasing is an option to consider. Because most banks will require you to have a good credit history to apply for auto loans. So if you don’t have it yet, then getting one will be difficult, rather impossible. But with a lease, your income status matters, and so does your residence period here in the United States.
The obvious difference is that you own your vehicle after paying off your loan. With a lease, you return it. Both are typically for three years, although there are longer leases out there now.
