Car Financing vs Leasing

Car Financing vs Leasing

Know the difference between a car loan and a lease - and which is best for your situation.

By Gary Smith (Contributing Author) | Published on April 26th, 2021 | Last Updated on
By Gary Smith (Contributing Author)
Published on April 26th, 2021. Last Updated on .

When it comes to getting a new car, there are a couple of different options you will have when it comes to paying for the vehicle. You can pay for the car in full with cash, finance the car, or lease the car. Since most people will not be buying their new car in full, we are going to discuss the difference between financing and leasing a vehicle, what the pros and cons are, and the scenarios where each would be the best option.

Car Financing 

Financing a car refers to the process of purchasing a vehicle with a car loan. This means you will be paying the car off in monthly installments until the car is paid in full. You can choose direct lending or dealership financing to purchase your vehicle and both have their own advantages.

Direct Lending

When getting a loan for your vehicle through a financial institution, bank, or credit union, this will be referred to as direct lending. Your loan officer will draft up a loan agreement that states that you will pay the amount you have requested to finance, plus the finance charge (interest rate) over a specified amount of time. Once your loan is approved, you can use it to purchase the vehicle.

Dealership Financing

Some dealerships may offer in-house financing as well. This will be very similar to the loan application process from the direct lending options, however, you will have your loan through your dealership. Your dealership will most likely sell this contract to a bank, credit union, or finance company. While this may seem like an extra step compared to direct lending, it actually helps with convenience when you are trying to purchase a car the same day as you can have your loan approval within minutes.


When You Should Finance A Car

One of the biggest questions regarding financing a vehicle is whether or not it is the right decision. To determine if you should finance a vehicle, you will need to consider whether or not you want to own the vehicle. If you plan on keeping your car and have intentions of paying it off, financing is your best option. This will allow you to slowly pay off the vehicle to eventually pay it off and own the vehicle entirely. Financing a vehicle is a great alternative to paying for a vehicle in full with cash.

Pros
  • Allows You To Slowly Pay Off Vehicle
  • Various Financing Options
  • You Will Eventually Own Your Vehicle
Cons
  • Not A Great Option If You Like To Switch Vehicles Every Couple Of Years
  • Usually Has Higher Payments

Car Leasing

Leasing a vehicle is basically renting a vehicle from a dealership for a specified time. Most lease contracts last 3-4 years, and at the end of this period, you will have the option of returning the vehicle or purchasing for an amount agreed upon by the dealer in the lease contract. The monthly payments on a lease agreement tend to be lower than financing options. Leasing a vehicle means that you will never pay off a vehicle, therefore no equity is built and you will never own the vehicle. However, there are situations where leasing a vehicle may be a better option for you.


When You Should Lease A Vehicle

Sometimes, leasing a vehicle may make more sense when comparing it to financing a vehicle. For example, if you are someone who enjoys getting a new vehicle every couple of years, leasing a vehicle could be a great way to choose a new vehicle every 3-4 years. Since most new vehicles have 3-year manufacturer warranties, leasing allows you to enjoy worry-free maintenance. Leasing a vehicle also takes out the worry of having to haggle with a dealership or private party when selling your vehicle. Since you will be giving your car back to the dealership every few years, you will not have to deal with the selling stress.

Pros
  • Lower Payments
  • Get The Option To Purchase The Car At The End Of The Leasing Time
  • New Car Every Few Years
  • Worry-Free Maintenance
Cons
  • No Equity Built-In Vehicles
  • Cannot Sell Or Trade Your Vehicle
  • You Will Continue To Pay For Your Lease Without Ever Paying Off A Vehicle.

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