No matter what you do for a living or where you call home, a dependable vehicle can be the perfect way to travel and get things done. While any car can cost a lot of money over the years, the investment is usually worthwhile if it makes life easier for you or your family.
However, if you’re interested in getting a newer or more expensive model, chances are you’re trying to decide between financing it or leasing it. Keep reading if you need help figuring out which car payment option is right for you.
Key Points
- Leasing offers more flexibility and lower monthly payments, while financing provides ownership and long-term savings.
- Leasing might make sense if you want a new car every few years and want to keep your monthly payments low.
- Financing may be more suitable if you prefer to own the vehicle outright and want more freedom to drive the car as much as you want.
Leasing vs. Financing A Car: An Overview
| Leasing | Financing | |
| Ownership | You don’t own the vehicle. You either return it or buy it at a predetermined price. | You own the vehicle after you’ve fully repaid the loan. |
| Monthly Payments | Usually lower than financing. | Usually higher than leasing. |
| Down Payment | May require a down payment, depending on the dealer and your contract. | Typically requires a down payment. |
| Mileage | Limitations on annual mileage. Excess mileage typically incurs fees. | No mileage restrictions. |
| Modifications | Limitations on modifications. | No restrictions on modifications. |
| Maintenance | Often covered under warranty throughout the lease term. | You’re responsible for paying for maintenance once the warranty expires. |
| Equity | You don’t build equity because you don’t own the car. | You can build equity as you pay off your car loan. |
What’s The Difference Between Leasing vs. Financing A Car?
Although both can be acquired at your local auto dealership and involve similar payment processes, leasing and financing a vehicle are two different options.
What Does It Mean To Lease A Car?
A car lease involves paying to use a car for a set period, typically from 2 to 4 years, without actually owning it. Essentially, you make payments in exchange for using the vehicle.
At the end of the lease, you can return the vehicle, or buy it at a predetermined price. Leases typically come with lower monthly payments compared to financing but have restrictions on modifications and mileage.
Pros Of Leasing A Car
- Lower Monthly Payments. When purchasing, financing is based on the full value of the vehicle minus your original down payment. On the other hand, leasing only charges the driver based on the difference between the original price and the price after the depreciation of the car. In the end, you’ll only be charged the drop in the car’s value over the years you’ve had it.
- You’ll Always Have A New Car. Leasing can allow you to always have the newest model car with the most recent innovations in technology and features. You’ll also most likely never have to deal with any maintenance headaches if you’re leasing every three years. In the end, you can get more car for less money.
- Less Maintenance. A leased vehicle is often covered under warranty for the duration of the lease contract. So, you won’t have to pay to maintain your vehicle for many issues that may arise.
- No Risk Of Negative Equity. When you lease a car, you’re basically renting it for a certain amount of tie. You don’t own it. So, the possibility of winding up with negative equity is not as prevalent as when you’re financing a car.
Cons Of Leasing A Car
- No Ownership. You don’t own the vehicle at the end of the lease, unlike financing that allows you to own the car outright once you’ve repaid your loan.
- Limits On Mileage. Lease contracts typically include limits on how many km’s you can drive every year. If you exceed the mileage, you’ll incur extra fees.
- Customization Restrictions. You can’t make modifications to the vehicle without the consent of the dealer. And even then, odds are modifications won’t be allowed.
What Does It Mean To Finance A Car?
Vehicle financing involves taking out a loan to cover the purchase price of a car, and then repaying the lender over time with regular installment payments. The loan typically includes interest, which increases the total cost of the car. Once the loan is fully paid off, you own the car outright.
Pros Of Financing A Car
- Ownership. Once you fully pay off the car loan, you’ll own the vehicle outright.
- No Mileage Limits. You’re free to drive as much as you want without incurring penalty fees for going over a certain mileage limit.
- Customization. You can modify the car however you like without having to get permission from the dealer.
Cons Of Financing A Car
- Higher Monthly Payments. Financing typically comes with higher monthly payments than leasing.
- Maintenance Costs. You are responsible for covering the cost of maintenance after the warranty expires.
- Older Vehicle. You’ll be more likely to hang on to your car for many years since you own it, which means you’ll eventually be driving an older vehicle. This is in stark contrast to leasing, which allows you to drive a new vehicle every few years.
- Possibility Of Negative Equity. Negative equity can happen if the vehicle depreciates faster than you repay the loan, especially if you make a smaller down payment or opt for a long loan term. This is a possibility when financing, but is much less of a concern when you lease.
Where Can You Get Car Financing?
You can apply for vehicle financing through the following:
- Bank or Credit Union – Traditional financial institutions may provide car loans, though you’ll need good credit to get approved. If you apply with a credit union, you’ll need to be a member of the institution first. Some drivers would rather apply with a bank or credit union because loans are larger, rates are lower and there’s more security.
- Alternative Lender – If you can’t get approved by your financial institution due to bad credit or a low income, you may have better luck with an alternative lender. These lenders can offer you a smaller personal or vehicle loan with a higher interest rate and tighter payment plan, despite your bad credit, though you’ll pay higher interest.
- Dealership – Dealers typically offer in-house financing, where you pay them directly instead of applying for a loan elsewhere. Like alternative financing, approval restrictions are often easier. Rates and terms vary from client to client.
The Costs Of Leasing Vs. Financing A Car
Now, let’s talk about the cost comparison between leasing and financing a vehicle. The conditions of your specific leasing or financing contract will vary based on where you apply, which car you want, and what your finances look like.
That said, leases tend to come with lower interest rates compared to financing rates because leasing involves borrowing against the vehicle’s depreciated value instead of the full purchase price.
To help you understand how the cost of leasing versus financing may differ, let’s illustrate using an example:
| Finance | Lease | |
| Term | 5 years | 5 years |
| Price | $40,000 | $40,000 |
| Down Payment | $4,000 | $0 |
| Total Loan Amount | $36,000 | $40,000 |
| Interest Rate | 10% | 5% |
| Buyout (Residual Value) | – | $25,000 |
| Monthly Payment | $764.89 | $385.63 |
| Total Paid | $45,893.4 | $23,137.8 ($48,137.8 if you opt to buy the car at the end of the term for $25,000) |
How Are Lease Payments Determined?
Your lease price is based on the following factors:
- Sale Price: This is the original cost of the car.
- Residual Value: This represents the value of the vehicle at the end of the lease term.
- Depreciation: This represents the selling price minus the residual value.
Lease payments are typically calculated to ensure they cover the depreciation over the lease term. The residual value and depreciation are based on historical information from the same make and model in years past, as well as on expected trends going forward.
Leasing Vs. Financing With Bad Credit
It can be tough to get approved for some credit products and financial services if you have a bad credit score of 600 or lower. Since it could be due to problems with unpaid debt, your lender/dealer will consider you a higher-risk borrower.
So, your approval chances and amounts will be lower than someone with good credit. In addition, interest rates will be higher and repayment plans more restrictive. Unfortunately, this may be the case when you try to finance or lease a car.
Is It Easier To Get Approved For Bad Credit Leasing Or Financing?
As long as you have an income that will support your payments, there are plenty of dealerships that will offer you leasing or financing, no matter how healthy your credit is. However, the costs can be higher than if you don’t have good credit.
That said, if your credit is particularly bad, it can be harder to get approved for a lease than a car loan because you cannot offer any security, such as collateral or a cosigner. As such, the dealer would be taking more risk. As it would technically still be their property, they could wind up with a car that’s depreciated significantly in value, if you default.
Should You Lease Or Finance Your Next Car?
| Lease Your Car If… | Finance Your Car If… | |
| Payments | You prefer lower payments | You don’t mind higher payments |
| Car Condition | You want to try out new models, different brands and/or new features | You really like a particular car and want the option of driving or customizing it however you want |
| Repairs | You want less likelihood of repairs and all maintenance covered under warranty | You don’t mind being responsible for all repairs and maintenance when your warranty ends |
| Ownership | You’re not concerned that you won’t own the car once your lease is over (less responsibility) | You would rather own the car when your repayment plan is done (for collateral, reselling, etc.) |
| Driving Lifestyle | You can stick to a specific mileage and wear & tear limit (any damage may cost you) | You don’t want to be restricted by mileage or potential repairs and would rather drive how you want |
| Affordability | You prefer a shorter, cheaper repayment term and don’t mind applying again later on | You don’t mind a longer, slightly more expensive loan term that you only have to apply for once |
Leasing Vs. Financing A Car – What If You Want To End Your Contract Early?
Prior to leasing or financing any vehicle, another essential consideration to make is how long you want your repayment term to last. After all, while your payments might be affordable enough at first, you never know what can happen down the line, especially if you lose your job or experience a financial emergency.
You may also want to terminate your contract for other reasons, like if you’re moving or are unhappy with your car.
Either way, if you’re in the middle of a leasing or financing deal and you want out of your agreement, you could face issues.
Ending Your Car Lease
Ending your lease early can lead to the following consequences:
- Early Termination Fees. You may be charged a fee for breaking the lease early before the end of the term.
- Remaining Payments. You may have to reimburse the dealer for the balance of your remaining payments.
- Excess Wear And Tear. You may need to cover any wear and tear or accidents the car has gone through.
If you’re worried about the consequences of breaking your lease, one of the only options left would be to sell or transfer it to someone else, which can be just as expensive and inconvenient as terminating your contract or waiting until it ends naturally.
Learn more: How to Get Out of a Car Lease
Ending Your Car Loan
Ending your loan contract early can result in the following consequences:
- Early Repayment Penalties. Like breaking a lease contract early, backing out of your car loan agreement could result in early repayment penalty fees for paying off the loan before the term ends.
- Remaining Balance Owed. You may still owe the remaining loan balance if the car is sold for less than what you owe.
- Impact On Credit. If you default on the car loan, the lender may seize the vehicle and your credit score may take a hit.
Overall, ending a lease early can be more problematic and costly than a car loan. The extra fees and interest you’re charged when financing depends on the amount of late or missed payments you have. If you negotiate with your dealer and have been making payments responsibly until that point, they may agree to buy the car back, minus any penalties and interest or allow you to trade it in for one with a cheaper payment plan.
Learn more: How To Get Out Of Your Car Loan
Final Thoughts
Both leasing and financing offer certain perks depending on your personal needs and financial situation. Leasing offers a new vehicle every few years, potentially lower monthly payments, and less hassle with maintenance, but you won’t own the car and will have to deal with restrictions on mileage and customization. On the other hand, financing comes with ownership, no limits on mileage, and the flexibility to customize your vehicle, though you may be charged higher monthly payments and will have to deal with potential depreciation.
