When A Car Lease Is Better Than A Car Loan

Young and handsome businessman buying car and taking keys from seller

When you’re in the market for your next vehicle, you’ll have a myriad of choices to make. From the type — SUV, car or truck, for example — to the make and model, this range of choices makes it easier to find the new vehicle that fits your lifestyle, budget, and other factors. Another choice you’ll need to make is whether leasing a new car is better for your situation or financing your purchase with a car loan.

The Similarities Between Lease vs Finance

There are a number of similarities between leasing a new car and financing it using a car loan. These similarities could explain some of the confusion surrounding these two methods of bringing a new car home.

You Can Drive a New Vehicle Home

In general, leasing is limited to new cars. When financing with a car loan, financial institutions would also rather do so with a new car. There are often strict limitations on financing for used cars.

Photo of young woman choosing a new car in automobile center

You’ll Have a Contract That You’re Obligated to Honor

Whether it’s a lease contract or an auto loan, both are legally-binding agreements. You’ll have to make monthly lease payments until the end of your lease or you’ll need to make monthly payments on a car loan.

You’ll Need Specific Car Insurance

Both options require that you maintain full-coverage car insurance over the course of the lease agreement or car loan. With a leased vehicle, you might also be required to have something called GAP insurance. This offers both you and the leasing company further protection in the event that something unexpected happens.

You’re Required to Make Regular Monthly Payments

Unless you purchase a new car with cash outright, you’ll need to make monthly payments. In many cases, a leased vehicle means that you’ll have lower monthly payments.

You Can Often Use a Trade-In

Car dealerships and leasing companies alike want to make it easier for you to drive a new car home so they’ll often allow you to use a trade-in. Doing so can help you negotiate a lower overall price of the vehicle. This will also reduce your monthly loan payments.

You’re Required to Make a Down Payment

Both a car lease and an auto loan require that you make a down payment. The typical amount of a down payment is generally around 20 percent of the price of the vehicle for an auto loan.

You’ll Have Additional Fees

In addition to the price of the vehicle — minus any trade-in allowances and other incentives — you’ll have other fees at the close of both a lease agreement and a car loan. Fees such as an origination charge, registration, and attribution charge are typically paid upfront as part of the amount you’ll need to pay before you can drive away with your next car.

The Differences Between Lease Vs Finance

It’s true that there are many similarities between lease vs finance. However, it’s the differences between the two that really highlight how one can be the perfect choice for you while the other could become a hassle. Understanding these can help you choose the right option.

Monthly Payments

One of the most important differences between a car lease and an auto loan is that you’ll have lower monthly payments when you lease. This is because you’re actually paying for the depreciation that naturally occurs over the lease term.

In some cases, opting for an auto loan can mean significantly higher monthly payments. This can limit you regarding the type of vehicle you can afford to drive.

You also might have to limit what options you choose.

Brand-New Car

If you have your heart set on your next car having all the latest tech and safety innovations, you’ll find those on vehicles for lease at the dealerships you visit.

Those for sale on the lot might range from stripped-down models to those with a range of options. The cars for lease tend to have the latest options and are also more fuel-efficient.

Fancy Sports Car on Road in Motion

When it comes to the value of the car, you can often afford higher-end and luxury cars for a lower monthly payment than you could get if you got a car loan. This provides you with the opportunity to drive the car of your dreams without having a high monthly payment to go with it.

Maintenance and Warranty Coverage

One of the costs of owning a new car that many people don’t think about is budgeting for major repairs. Even routine maintenance can often get left out of your monthly budget since it’s only an occasional expense.

Purchasing a new car gives you access to a warranty from the automaker for a certain time frame. Most last for three to five years and have various mileage requirements. Once you’re past that time, though, you’re on your own if anything major happens to the vehicle.

A car lease agreement typically lasts between two and three years. This is well within the time frame of most warranties offered on new vehicles. If something major should happen while you’re still within the lease term, the dealership should take care of all the costs for you.

Interest Rates

Both car buying and car leasing require that you take interest rates into account — unless you’re purchasing a car with cash upfront. While purchasing a car means you’ll be dealing with interest rates throughout the loan term, if you lease a new vehicle, you’ll be more interested in the current lease money factor rates.

This money factor is a term used in the car leasing world. It can be converted to a more familiar interest rate format for easier comparisons. Simply take the money factor number given to you by the dealership or leasing company and multiply it by 2,400.

Down Payment Requirements

Whether you opt to secure an auto loan or you decide on a car lease, you’ll need to pony up for a down payment. Here’s where the similarities end though.

In nearly all cases, leasing a vehicle means you’ll pay less for a down payment. You might even discover that the dealership or leasing company you’re working with doesn’t require a down payment at all during the signing of the lease agreement. It’s often advised to aim for the lowest amount due at signing when negotiating leases.

Sales Tax

In many states, sales tax is treated differently for leased vehicles and those that you purchase outright or using a car loan. If you purchase a new car, you’ll have to pay sales tax based on the entire purchase price of the new vehicle.

For leased cars, many jurisdictions require only that you pay sales tax on the monthly lease payments and your down payment. In other instances, you might need to pay sales tax on the purchase price of the new car much like you’d need to if you purchased it.

Options for the Future

When you purchase a new car, you’ll have the option to drive it for as long as you like. If you like the vehicle, there’s not a problem unless it becomes a hassle to have it repaired. However, if you don’t like the vehicle, you’re stuck with it until you pay it off unless you can find someone to take over the car loan for you.

One of the benefits of leasing is that there are so many lease-end options. You can take the car back to the dealership at the end of your lease agreement and walk away from it once you pay any fees for excessive wear or going over the mileage limits.

You can choose to lease another vehicle. You might decide to purchase the used car and avoid the hassles of finding another vehicle.

Trade-Ins Made Easy

One of your end of lease options is to use the leased vehicle as a trade-in on another new car at the same dealership. You can often avoid having to pay any additional fees if you decide to take this route. If you purchase a new car, you’ll have to shop around to get the best trade-in price when you’re ready to make a change.

Car Insurance

Both purchasing a new car and a leased vehicle require that you have comprehensive car insurance coverage. In addition, many dealerships and leasing companies also require that you purchase guaranteed asset protection (GAP) insurance.

GAP insurance provides valuable protection for both you and the dealership or leasing company. While your regular auto insurance will often kick in if you have an accident, GAP insurance is there to provide coverage if the leased car is stolen or if you total it.

GAP insurance might be sold by the dealership or leasing company. Compare their prices with the quotes you get from your own insurance company to make sure you’re getting the best deal.

Is It Better to Lease or Finance a Car?

There are both pros and cons of leasing a car. If you’re still undecided, keep the following benefits of leasing a car in mind:

Buying is More Expensive in the Short Term

When you’re buying a vehicle, you’re paying for the entire new car. A car lease means you’re paying only for the residual value of the leased car. This is an estimation by an independent company of what the car will be worth once it has depreciated.

Buying a new car means that you’ll have to come up with a large down payment. This could be a requirement of the dealership or it might be necessary in order to keep your monthly payments at an affordable level for you.

You’ll Pay More in Interest

Because you’re charged interest on the entire purchase price of the new car, you’ll pay more in interest across the loan term. With a car lease, though, you’re paying interest only on the difference between the vehicle’s residual value and its capitalized cost.

Caution Sign - Higher Interest Rates Ahead

You’ll Have to Make a Down Payment

No matter how good your credit score is, you’ll likely have to come up with a substantial down payment if you want to purchase a new car. A new lease, though, often requires only a minimal security deposit.

Leasing a brand-new car often means that you’ll save money while also getting to drive a luxury car or one with the latest features. You also won’t have to deal with the hassle of car ownership once you reach the end of your lease.

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