Car Finance

Car Financing Versus Car Leasing

By Mike Richards Updated: 06/14/2022 Posted: 06/27/2018

Buying a car is a big decision, especially when it comes to the financing options available to you. Well, that decision is also dependent on your credit score. If your credit score is good, or even great, getting financing for a new car will not be a problem. However, if your credit score is anywhere below 620 points, your car financing option is limited to subprime borrowing. This often comes with very high-interest rates. You also want to consider car leasing. This could provide you with an opportunity to drive a car you won’t normally afford. Whether you decide to go for car financing or car leasing depends on a number of factors. Let’s look, what’s the difference between financing and leasing a car?


Car Financing

Let’s face it, not everyone can afford to buy a car without car financing. If you are blessed to be among the few who can walk into a showroom and drive out in a brand new fully-paid-off car, then you are truly lucky.

However, most people have only two choices: to seek car financing or lease a car. If you decide to go for car financing, your credit score better is good if not excellent. With a good to excellent credit score, you won’t have any trouble securing your car financing for a new or used car. However, if your credit score is anything but good, you may have to brace yourself for high-interest rates.

While traditional lenders avoid bad credit car loan applications, some subprime lenders specialize in financing used cars for people in dire straits. However, their interest rates and processing fees are typically too high. You have to be careful with these lenders as the car you are purchasing may end up costing you way too much. There are cases of people who go on to buy their second car while still servicing a previous car loan.


Pros of Car Financing

The main advantage of car financing is that you get to own the car after your last payments. This factor is critical to consider, especially if it is a car you would like to keep for a long time. In any case, you have the option of selling it if you want. However, you could also decide to keep it and cherish it, and maybe pass it down a generation or two as a classic.

Another advantage of financing used cars is that there are no restrictions as to the kind of modifications you can subject the car too. It’s your car, and you can do with it whatever you want, and also drive it for as long as you want without having to watch the odometer. However, before you start modifying it, you might want to check with your financier to see what’s allowed, unless you have finished paying for it.


Cons of Car Financing

It’s a no-brainer that you will have to pay for the car by the end of the loan term; so that can’t count as a real downside. However, there are some disadvantages to buying a used car through car financing. One, the interest rates are too high; more so if you if, you procured funding from a subprime lender. It can seriously derail your credit recovery journey. It gets even worse if you default or skip payments. So, keep this in mind as it is crucial in car financing. You can, however, work around this problem by making timely payments and occasionally paying lump sums on the premium.

The other downside is the maintenance costs, especially once the car is fully paid. You see, the vehicle may be a tad too old by now, and maintenance costs could seriously set you back a couple of hundred bucks. You, however, have the option of selling it or trading it in for a better car.

Unless the car has Concours d’Elegance potential, it’s advisable to sell it as soon as possible after loan payment completion, or trade it in for a newer car. The disadvantages notwithstanding, getting financing for a new or used car has many advantages. To be approved for a car loan is in itself a win.

However, perhaps car financing is not your best option right now for reasons only known to you. If that’s the case, why not consider leasing a car instead? Is it better to lease or finance a car?


Car Leasing

If you are thinking about getting a brand new car, you might want to consider leasing one. A car lease gives you the opportunity to drive the latest model, the kind of car that you won’t otherwise afford to buy. There are many benefits you can gain by leasing a vehicle as opposed to purchasing one.


Advantages of Car Leasing

The monthly payments for a car lease are lower than those of a car purchase. Besides the fact that the leased car may be of a superior look and function than the one you could afford to buy, the lower monthly payments mean you can do more with your finances while still cruising around in the car of your dreams.

Besides the low monthly payments, the down payments are less compared to other financing options. It works very well for your credit score recovery journey since you now have more funds left to start clearing other high-interest loans you may be servicing.

The opportunity to drive the car of your dreams is a chance you may not want to pass. While you can drive any car at any age, it might make more sense to lease one now than waiting for years to qualify for car financing. In any case, we are only young once. A car lease provides you with the opportunity to drive the latest model, now!

Another advantage is that the lease agreement may cover the maintenance costs up to a certain mileage limit. The accumulated savings such an arrangement can provide are definitely worth leasing a car for.

When your lease is expired, all you have to do is drive down to your dealer, pay whatever outstanding amounts you may still owe, sign a new lease and drive out with the latest model of the car of your dreams!


Disadvantages of Car Leasing

If you are the kind of person who likes holding on to a car until it becomes an antique, then car leasing may not work well for you. This is because you are obliged to return it at the end of the lease. Of course, you have the option of renewing the lease or signing up for another car lease.

Another disadvantage of a car lease is that you are not allowed to make any modifications to the vehicle. If after some time you don’t like how it looks from the outside or the inside, you are stuck with it as it is. You can’t even change the engine for a more powerful alternative.

There are mileage restrictions as well. Once the set mileage exceeded the allowed limit, you will be charged extra for the excess mileage. If you did not negotiate for a fixed rate for the extra mileage at the time of signing the agreement, you might find yourself paying a lot more extra for every mile or kilometer you cover.

Whereas the decision to buy or lease a car depends on your financial circumstances if your goal is to drive a new car, but you don’t have adequate resources, leasing a car may be the best option for you.

With a car lease, you get to enjoy the benefit of driving your dream car at more affordable monthly payments. A car lease would also be ideal for you if you need to use the car for a short time. Let’s say you have just got a job in a new state, but the contract is for only one or two years. In that case, leasing a car would be the most rational thing to do.

On the other hand, buying a used car may be the most practical thing to do if you don’t want to take a car lease, and you can’t get financing for a new car either. If you do your due diligence well, you might even get a used car that is almost as good as new, at a fraction of the cost of its new equivalent. A used car may also be ideal for you if you are looking to buy a particular model that has gone out of production. Used car dealers have a knack for selecting good quality vehicles, some with antique potential. The other reason why you might want to consider financing a used car is the cost.

To buy or to lease a car depends on your circumstances and your taste. While a car lease may be the best option for one person, buying a used car through an auto financing facility may be the most practical option for another.