Buying a car can be exciting, but one of the first decisions you’ll face is whether to lease or finance your new vehicle. Both options have their advantages and disadvantages, and choosing the right one depends on your budget, lifestyle, and long-term plans. Let’s break down the key details to help you decide.
Leasing vs. Financing: What’s the Difference?
Financing a Car
Financing means you take out a loan to buy the car and pay it off over time. Once the loan is fully paid, the car is yours to keep or sell.
Benefits of Financing:
- You own the car after the loan is paid.
- No mileage restrictions—drive as much as you want.
- You can modify, sell, or trade the car anytime.
Potential Downsides:
- Higher monthly payments compared to leasing.
- The car’s value may depreciate quickly, leaving you with a lower resale value.
Best for: Those who plan to keep the car for many years and want full ownership.
Leasing a Car
Leasing is like renting a car for a set period (usually 2-3 years). You make monthly payments, but you don’t own the car at the end of the lease unless you choose to buy it.
Benefits of Leasing:
- Lower monthly payments compared to financing.
- Drive a newer, nicer car every few years.
- Fewer maintenance worries since many leases cover repairs.
Potential Downsides:
- You don’t own the car, so you can’t sell or modify it.
- Mileage limits and fees for exceeding them.
- No value to trade in once the lease ends.
Best for: Those who want a new car regularly and don’t drive long distances.
What Is a Lease Buyout?
A lease buyout allows you to buy the car at the end of your lease for a predetermined price. This option is great if you’ve grown attached to the car or if it’s in excellent condition.
Financing Smart: Tips to Save Money
Captive Financing
Some car manufacturers offer loans through their in-house lending services, often with attractive low-interest rates. These deals can be enticing, but watch out for shorter loan terms that may result in higher monthly payments.
Dealer Lending
Dealerships can shop your loan around to different banks to get you approved. However, they may offer you a higher interest rate than the bank recommends to increase their profit. To avoid this, get pre-approved for a loan through your bank or credit union before visiting the dealership.
Used-Car Financing
Financing a used car may come with higher interest rates, especially if the vehicle is older. You can reduce costs by negotiating the car’s price or opting for a shorter loan term.
Should You Consider Long-Term Loans?
Some lenders now offer 84-month (7-year) loans, which can lower your monthly payments but increase the total interest you’ll pay. This option is risky because you may still be making payments when the car needs expensive repairs. If a 7-year loan is the only way to afford a car, consider a cheaper model or a lease instead.
What to Do If You Have Bad Credit
If you have a poor credit score, expect higher interest rates on car loans, especially for used cars. Rates can exceed 21% APR for credit scores under 500. Here’s what you can do:
- Improve your credit: Pay off debts and correct errors on your credit report.
- Use a co-signer: This can help you secure a lower interest rate.
- Consider refinancing: After a year of on-time payments, you may qualify for better rates.
How to Handle Car Dealership Negotiations
Do Your Research
Before visiting a dealership, research the car’s price, features, and reviews. Knowing the car’s value will help you negotiate a better deal.
Don’t Show Emotional Attachment
If the salesperson knows you love the car, they’ll push harder to close the deal at a higher price. Stay calm and objective.
Be Ready to Walk Away
Dealerships often pressure buyers to commit quickly, but walking away can give you more leverage to negotiate a better deal when you return.
Deciding whether to lease or finance a car depends on your needs. Leasing offers lower monthly payments and the chance to drive a new car regularly, but you don’t build equity.
Financing gives you full ownership, but you’ll face higher payments and long-term maintenance costs. Whichever option you choose, research your loan options, negotiate wisely, and stay within your budget.
FAQ’s
Is it cheaper to lease or finance a car?
Leasing is usually cheaper in terms of monthly payments, but financing helps you own the car eventually. Leasing suits those who prefer short-term affordability, while financing is better for long-term savings and ownership.
Can I buy the car at the end of a lease?
Yes, many lease agreements offer a buyout option, allowing you to purchase the car for a pre-agreed price when the lease ends.
How can I get the best interest rate on a car loan?
To get the best rates, get pre-approved through your bank or credit union, check manufacturer deals, and compare multiple lender offers before deciding.
What are the risks of long-term car loans?
Long-term loans (e.g., 84 months) may lower your monthly payments but result in paying more interest over time. They also increase the risk of paying for repairs while still making loan payments.
Can I get a car loan with bad credit?
Yes, but you may face higher interest rates. To lower costs, consider improving your credit score or using a co-signer. Refinancing later can also help reduce interest rates.