Buying a Car with a Loan vs. Leasing

When it comes to the decision of adding a vehicle to your life, the choice between leasing a vehicle and buying one is a tough one. On one hand, leasing a car has lower monthly payments, however you could get into a cycle where you never stop paying for the vehicle. On the flipside, buying a car involves higher monthly costs, but in the end, you own the vehicle.

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Buying a Car with a Loan

In this option, you are basically spreading out the full cost, or asking price of the car,over a longer period of time. In order to do this, you will borrow the money that you need from a financial institution or lender, such as a credit union or a bank.

It is important to understand, that your loan application may be rejected as this is based on your credit history. If your loan is however approved, you will start by paying a down-payment toward the loan. In many cases, this is usually at least 20% of the cost of the vehicle, but if you are able to make a bigger down payment, this will help to reduce your monthly payment amounts. Once the down payment is made, and the relevant paperwork is signed, the car is yours. You will then be required to pay the monthly payments to the lender until the full amount you have borrowed has been paid back in full.

Leasing a Car

If you like the sound of saving money when making the down payment and driving a different vehicle every few years, then leasing may be right for you.

A loan is not involved when you lease a vehicle. Instead, you will need to establish lease terms, which are based on how many miles or months you want to drive that vehicle. This could be, for example, 12,000 miles per year or for 24 months. As with the loan option, you will need to make a down-payment as well as pay a monthly fee. On the upside, the down-payment you will need to make is lower when you lease.

Once the lease term has ended, or you have reached the mileage cap, you will then be required to give the car back to the dealership and pay mileage fees or excess depreciation, if any. At that point, you also have the choice of buying the car at its residual value.

Buying a Car with a Loan versus Leasing

Ownership

When you lease a car, you do not own the vehicle and while you can use it during the lease period, you will need to return it to the dealership at the end of the term, unless you decide to buy it. When you buy a car with a loan, you own the vehicle and you can keep it for as long as you wish to.

Costs Up-Front

When you lease a car, the upfront costs include a down payment, the first month’s payment, an acquisition fee, a refundable security deposit, taxes, registration, and any other applicable fees. With a car loan, you will be required to make a down payment,and to pay any taxes, registration, and any other applicable fees.

Monthly Payments

In most cases, lease monthly payments are lower than loan payments. This is because you are paying only for the depreciation of the car during the lease term, plus interest or rent charges, fees and taxes. Loan monthly payments are usually higher because you are paying for the entire purchase price of the vehicle, as well as interest and other finance charges, fees and taxes.

Vehicle Return

When you lease a car, you will need to return the vehicle at the end of the lease period and will then be required to pay any end-of-lease costs. When you buy a car with a loan, the car is yours and you will not need to return the vehicle. When you decide you want a different car, you can then look at selling or trading in your car.

Early Termination

If you want to terminate your lease contract early, charges may apply for breaking the terms of the contract. When you have bought a car with a loan, you have the flexibility to sell or trade in your vehicle at any time. If required, you can then use the money from the sale to pay off your loan balance.

Mileage

When you lease a vehicle, you will be limited by the number of miles you may drive.This is often between 12,000 to 15,000 per year, but a higher mileage limit can be negotiated. If you exceed these limits, you will have to pay charges. When you have bought a car with a loan, you are not limited by the number of miles you can drive.Remember though, that a higher mileage will lower the vehicle’s resale or trade-in value.

Wear and Tear

If your leased vehicle has excessive wear and tear, you be held responsible and will be required to pay extra charges for exceeding normal wear and tear. If you have bought a car with a loan, you do not need to worry about the wear and tear on the vehicle.Remember though, that excessive wear and tear will reduce the car’s resale or trade-in value.

Customizing

When you lease a vehicle, you will need to return the car in a good condition. You will also be required to remove any custom parts or modifications you may have done to the car. If there is any residual damage, you will be liable to have this fixed or you will need to file an insurance claim and then pay a deductible. When you buy a car with a loan,the vehicle is yours. This means that you can customize or modify it as you wish.