One of the questions that might come up when you’re looking for a new vehicle is whether you should finance a car vs. lease.
Both have their advantages and drawbacks, and we’ll go over the differences between the two here.
Key Differences Between Financing A Car vs. Leasing
Financing and leasing a car are both ways to get behind the wheel, but they have fundamental differences.
The main difference between leasing and financing lies in the matter of ownership. Put simply, when you finance a vehicle, you own it, whereas when you lease, you’re essentially just renting it out for a while.
Financing a car involves getting a loan to help pay for the vehicle. As you make payments, you build equity, and by the end, you completely own the car.
Leasing, on the other hand, involves making monthly payments to continue using the car. Once the term is up, you generally have to return it.
The monthly payments you make on a car loan are slightly higher than lease payments because you’re paying off the actual value of the car. Lease payments are designed to cover only the vehicle’s depreciation plus any taxes, fees, or interest the dealership might assess.
In terms of upfront costs, car financing involves a down payment, taxes, registration, closing costs, and so forth. To lease a car, you’ll usually have to make the first month’s payment upfront, plus a security deposit and any other fees.
One of the great advantages when you choose to finance a car vs. lease is that the vehicle is yours. You can do what you like with it, drive it as much as you want, make modifications, etc., but keep in mind that those might affect the resale or trade-in value down the road.
Leases tend to have more restrictions, such as yearly mileage limits, extra fees for excessive wear or modifications, and high early termination fees.
Auto loans typically last five or six years. Assuming you make all of your payments on time, by the end of that period, you fully own the vehicle.
Lease terms average about two or three years, and once that time is over, you’ll need to either return the vehicle or buy it used. Returning it early may incur hefty early termination fees, so it’s often worth it to hang onto the vehicle for the full term.
How To Finance A Car
Both financing and leasing have different processes. First, let’s look at the process of financing a car.
Before you start shopping for a car, it’s recommended that you get pre-approved for an auto loan. That way, you’ll know how much car you can afford. This makes the shopping process much easier by removing all the guesswork.
To be pre-approved, you’ll need to bring this information to your lender:
- Identifying information, such as name, photo ID, and social security number
- Employment information
- Proof of monthly income
Your lender will check your credit and give you a quote on how much they’d be able to lend you based on that information.
Finding the right car
Once you know how much you’d be able to borrow, it’s time to find a vehicle. That means shopping around dealerships, looking online, and checking reviews on specific makes and models.
Negotiating the right terms
Once you find a car that you like, you’ll want to negotiate for the right price. Vehicle prices are usually negotiable, so you can attempt to bring the price of a new car down by haggling.
During this step, be careful of any offers or extras your dealer may try to sell you. Some items, such as an extended warranty on a new car, can be useful, but verify pricing and determine if you want to opt-in.
Closing the deal
Once the negotiating is done, it’s time to close the deal with your lender.
Your dealer might contact your lender, and they’ll hash out the details. There will be paperwork for you to sign, so be ready for that part of the process. Also, you’ll probably face some closing fees on the loan once everything is completely approved.
How To Lease A Car
The process of leasing a car doesn’t involve a lender at all. It’s just you and the dealership.
Finding the right car
As with financing, you’ll first want to find the right vehicle. That will mean looking around dealerships and checking prices, plus negotiating with the dealer on the costs of leasing.
Negotiating capital cost & terms
When you’ve found something that you’d be happy with, negotiate the cost.
The cost of leasing takes the value of the vehicle (or the capital cost) and subtracts its residual value (its value by the time you turn it back in). It’s possible to negotiate for a lower capital cost, potentially reducing monthly payments.
Note that your dealer will add extra costs beyond the difference between the car’s capital and residual costs. Some might be negotiable, some not.
Filling out paperwork
Once you have the price hashed out, you’ll have a great deal of paperwork to sign. Make sure you understand everything they give you before you sign it, however. In some cases, it might be worth getting a financial professional or attorney to look at it.
Finance A Car Vs. Lease – Which Is Best For You?
Leasing costs less in the short term, but financing a car will offer more value in the long run, especially if you intend to own or trade-in your vehicle.
Additionally, auto financing enables you to get a lender on your side, which can be beneficial with lending institutions that make your best interests their top priority.