The Big Car Decision: Buy Or Lease?
The biggest thing to know about the difference between a car loan and lease is this - with a loan, you're paying to own a car. With a lease, you're paying to use a car that's owned by someone else. Seems simple enough, but there's a lot more to know than just that when deciding which is best for you.
Whether you choose a loan or a lease, understand that you'll pay for insurance, taxes, tags and other fees, and most likely a down payment. So, is it better to buy or lease? Take a look at the following table.
Pros and Cons of Buying
| Pros |
Cons |
| You can choose between a new or used vehicle and sell the car whenever you choose. |
The mileage, condition, and popularity of your car will determine its final value. |
| The car is yours when the loan is paid off, and you can use the car as security for another loan. |
If you don't make your car payments on time and in full, your lender can repossess the car and resell it. |
| You may put as many miles on the vehicle as you like and invest as much or as little as you choose in maintenance and repair. |
If the resale price of the car is lower than the amount you owe on your loan, you could get stuck paying the difference. |
Pros and Cons of Leasing
| Pros |
Cons |
| The vehicle will most likely be new because used-car leases are hard to find. |
You'll probably have to pay a penalty if you: break the lease early, exceed annual mileage limits, don't meet a specific maintenance schedule, or fail to make the required monthly lease payments on time. |
| When the lease ends, you can return the car, or buy it for a previously determined price (the residual value). |
You won't be able to pledge it as security for a loan because you don't own the vehicle. |
| Your monthly lease payments will be lower than monthly loan payments on a comparable car. |
You'll have to pay for any repairs needed at the end of the lease period to make the car re-sellable. |
You'll probably be able to lease a more expensive vehicle than you could buy because lease payments only have to cover a portion of the car's entire cost.
A loan may be a good choice if you put a lot of miles on your car every year, aren't real big on oil changes and other periodic maintenance, and have a steady income. But, a lease may be your better choice if you drive 12,000-15,000 miles a year, pay close attention to vehicle maintenance, and have an income that varies from month-to-month. Your decision should depend on your needs, your finances, and the type of vehicle you can afford. Just remember, once you sign a contract, you must make your payments. Failing to make proper loan or lease payments will have the same results: your credit record will suffer and you could lose the car.
You can use the following table to compare a loan contract to a lease contract:
| Car Loan Contract |
Car Lease Contract |
| An installment loan contract with fixed monthly payments for a set period of time (usually 36, 48, or 60 months). |
Installment lease contract with fixed monthly payments for a set period of time (usually 36 months). |
| Higher monthly payments because the loan pays for the entire cost of the car. |
Lower monthly payments because the lease pays only a portion of the cost of the car. |
| Loan balance must be paid off before the loan can be terminated. |
Option to walk away when the lease ends |
Whatever you decide, make sure you weigh the benefits and disadvantages of the car loan and lease to find out which suits your needs best.
