You’re ready to upgrade your vehicle and are preparing to head to the dealership. One of the first decisions you’ll have to make — along with what type of car to get — is whether to buy or lease your vehicle. And since most people can’t (or don’t want to) buy a vehicle outright, buying usually means financing.
Both financing and leasing come with a monthly payment, but they differ in whether you actually own the car or are just paying to use it. Which option is right for you will depend on your financial situation and what you’re looking for in a vehicle.
When you finance a car, you buy it using a car loan — you provide a down payment, and the loan covers the remaining cost. You then make monthly payments toward both the principal and interest on the loan. Auto loans generally have terms ranging from 36 to 84 months, with the most common being 72 months (or six years). The longer your loan term, the lower your monthly payment (and the more you’ll pay in interest).
Tip: Many people get a car loan from a bank or credit union. However, many dealerships also offer their own financing.
When you buy the car, it will be titled in your name. However, there will be a lien placed on the title so that if you fail to make your payments, the lender can repossess the vehicle. Once you’ve fully repaid the loan, the lien is removed from the title, and you fully own the car.
Leasing a car is similar to financing in that you’ll make monthly payments. But unlike financing, you never actually own the car. Instead, you’re essentially renting it for the term of the lease.
When you lease a car, the contract will state how long you’ll have the car and how many miles you can drive per year. The monthly payment covers the car’s expected depreciation, rental charge, taxes, and fees.
The lease agreement will state what happens at the end of the lease term. You may just return the car or you may have the option to buy it. You’ll also be on the hook for additional fees if you’ve exceeded the mileage limit or if there’s excess wear and tear or damage to the car.
Financing is the most popular way to buy a car, more than leasing or buying outright. Here are some advantages to financing a vehicle:
While financing a vehicle has its advantages, there are some downsides to consider:
While leasing isn’t nearly as popular as financing or buying a car outright, it does have its advantages.
Before leasing a vehicle, it’s important to understand the disadvantages:
Financing and leasing a car can both be great options, but neither is right for everyone. Here are some things to consider when deciding whether to finance or lease: