Lease vs Finance: How Should I Buy a Car?

Fran Majidi
June 13, 2019

If you’re debating whether you should lease vs finance car payments to own a vehicle, you should know that one is not necessarily better than the other. Deciding which type of purchase makes sense for you depends on your lifestyle. Some people see car ownership as a great achievement and they plan to drive that car until it dies or they plan to use it in lieu of a down payment when they are ready to purchase a new car. Others see no point in having an asset that’s diminishing in value every single day. They want the latest technology and the newest model available so they prefer leasing and switching up cars every few years. Where you fall between these two extremes depends on which way you’re swayed. Basically, deciding whether to lease or finance a car comes down to is whether or not you need to have a brand new car every few years or if having no car payments is your ultimate goal. People who finance to own often finance used cars, looking past the new models for fear of tempting (and expensive) bells and whistles. Those looking to spend less each month sometimes choose leasing because, even though it ends up being more costly in the end, the monthly car payments are lower than if they financed the same model/make car.

Whether you lease or finance a car, you’ll probably need to have full insurance coverage on your car. The minimum state requirements for car insurance are rarely sufficient unless you don’t need to take out a loan to buy your car. You’ll likely need liability insurance as well as collision and comprehensive coverage as well as any other minimum state requirements (like Personal Injury Protection, PIP) to protect a car that technically belongs to the lienholder. The value of your car will affect your auto insurance rates. It’s important to compare auto insurance quotes for the cheapest car insurance with the highest value. Whenever you’re ready to get on the road, SmartFinancial will compare car insurance quotes with several carriers for you.

How to Lease a Car and Insure It

When you lease a car, you sign a contract to make monthly payments on the car and return it to the car dealership when the contract expires. You’re required to maintain the car in good condition mechanically and cosmetically. This practice is very much like renting a car, except that when you lease, you’re paying off the depreciation on the car. Usually lease terms fall anywhere between 36 to 72 months. At the end of that period you are given the option of paying the residual, or remaining balance, to buy the car or finance it.

You are not required to put down a downpayment when you lease, but some people do, to keep payments lower each month. Sometimes, leasing offers with 0 APR are available to people with great credit.

You do not own the car unless you pay the balance at the end of your lease term. Your lien holder will most likely require that you choose high limits of liability insurance.

If you lease and continue leasing another car after your lease term ends, you are paying more than if you financed a car. However, you need nothing to little down to lease a car and payments are usually lower than if you financed the same car.

Not only are lease payments usually lower than financing payments, but if you’re buying an expensive car, you’ll probably find lease payments are easier to handle.

There are tax advantages of leasing a car if you’re self employed. You will not get the tax advantage if you finance the car.

When leasing you are limited in the number of miles you drive. Limits rarely exceed 15,000 miles. If you go over this amount, you will pay extra. You are also responsible for damages and wear and tear charges, which will be added on.

On the flip side, if your car needs repairs while it’s being leased, you’ll probably be covered by a warranty.

How Much of a Loan Can I Get if I Lease a Car?

Most lenders require that your car loan is 40% or less. If you terminate a lease, it can be very expensive so make sure you get a loan that you can afford.

How to Finance a Car and Insure It

When you finance a car, you are paying off a loan, usually with interest. A car loan is similar to any other type of loan, and you will own the car at the end of your contract term. A financing contract usually ranges between 24 and 84 months. After that period you can keep or trade in your car for a new car.

When you finance a car, you usually put down a downpayment or turn in another car as a downpayment. Your APR will be determined based on your credit rating.

Until you pay off your car, your lien holder will determine your insurance requirements. Most lien holders require that you carry collision and comprehensive in addition to liability.

You’ll spend more money upfront if you finance a car. However, after you own the car, you can carry lower limits on your insurance. You’ll even have the option of only carrying liability insurance, which will save you some money. If you decide you want another car, you can use your car as the down payment.

There may come a point in your car ownership where you owe more than the car is worth. This is called an upside down loan and it often happens when people can’t afford a car but want it enough to longer financing terms to buy it. It’s a good idea to buy gap insurance if this is your situation, otherwise, if you get into an accident you may have to pay for repairs out of pocket.

If you have a long commute or simply drive long miles for any reason, you may be better off financing a car. Usual lease mileage limits are usually no more than 15,000, which means that you pay extra for overage miles, sometimes very heavily. You will also not be taken to task for wear-and-tear charges which you’ll be responsible for if you lease instead of financing.

How Does Credit Affect a Car Loan and Car Lease?

If you have a low credit score, it’ll be cheaper for you to lease a car than it would be to finance it. You’ll also build better credit if you make all your payments on time. However, if your credit is very bad you may not be approved for a lease offer. Even if you qualify for a lease, if your score is not good, you will not qualify for low-interest or no-down payment offers.

If you’re considering financing a car and have a low credit score, you’ll likely be paying more in APR charges.

The best option for people with bad credit is to buy when the dealership is trying to move older cars to make room for new inventory. You may also be able to strike a deal if you agree to pay a sizeable portion of your monthly payments upfront. You can also arm yourself with proof of income if it’s substantial. Shop around at a few agencies to determine which has the best option for you.

What Are My Options to Buy a Car Aside from Financing and Leasing?

You can always take over another person’s lease. You’ll still have to apply with the lienholder but qualifying is much easier as a take-over. However, these deals usually come with no warranty so make sure you’re not taking over a lemon!

You can also get someone to co-sign a car purchase, preferably someone with a solid credit rating.

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