When you get a new car you can pay cash, get an auto loan, or sign an auto lease. Paying cash in full at the time of purchase is a simple transaction, but few people are in a position to do this. Leases and auto finance options are more common, but harder to understand.
Buying a car with an auto loan and leasing a car both have their pros and cons, and it’s a good idea to understand both of these options before you sign a contract.
Pros and Cons of Leasing a Car
The main advantages of leasing a vehicle are:
You typically pay lower monthly payments and interest rates than on an auto loan.
Turning in a leased car is generally easier than selling or trading in a used car.
A lease may allow you to drive a newer or more expensive car than you could otherwise afford.
The main disadvantages of a lease are:
When you lease a car, you are not the owner (although you may have the option to buy the vehicle at the end of the lease).
You are restricted in the number of miles you can drive. Many auto leases now charge extra if you drive over 10,000 miles.
You cannot make any custom changes to the vehicle, such as upgrading the stereo or tinting the windows.
Leases often contain termination charges if you turn the car in before the contract is over.
At the end of the lease, you may also owe extra fees for damage, excess mileage, or failure to perform required maintenance on time.
Leases often work best for people with a steady income who either need or want a new car without worrying about repairs. People in professions which involve extensive driving or contact with the public, such as traveling salespeople, real estate agents, and business people, often benefit from leasing a newer and more luxurious car than they could otherwise enjoy.
Pros and Cons of Buying a Car with an Auto Loan
When you buy a car with an auto loan, you usually pay more in monthly loan payments than on most leases for the same vehicle. However, as you make the payments, you accumulate ownership in the car. Although the car depreciates over time, all the sale proceeds are yours if you decide to sell the vehicle once the loan is paid.
The pros of buying a car with a loan are:
Your down payment and every payment after that build your ownership of the vehicle.
You can usually sell or trade in the car at any time without extra charges.
You can modify the car, and you do not have to be as concerned about minor damage to the interior or exterior of the vehicle.
The primary disadvantages of an auto loan are:
Monthly payments are generally higher.
If you want to sell the car later, you must do the work to find a buyer.
Whether you choose to lease or buy a new car, be sure to read and understand the contract thoroughly before you sign.