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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

You can choose between a new or used vehicle and sell the car whenever you choose.
The car is yours when the loan is paid off, and you can use the car as security for another loan.
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.

Cons

The mileage, condition, and popularity of your car will determine its final value.
If you don't make your car payments on time and in full, your lender can repossess the car and resell it.
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

The vehicle will most likely be new because used-car leases are hard to find.
When the lease ends, you can return the car, or buy it for a previously determined price (the residual value).
Your monthly lease payments will be lower than monthly loan payments on a comparable car.

Cons

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.
You won't be able to pledge it as security for a loan because you don't own the vehicle.
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

An installment loan contract with fixed monthly payments for a set period of time (usually 36, 48, or 60 months).
Higher monthly payments because the loan pays for the entire cost of the car.
Loan balance must be paid off before the loan can be terminated.

Car Lease Contract

Installment lease contract with fixed monthly payments for a set period of time (usually 36 months).
Lower monthly payments because the lease pays only a portion of the cost of the car.
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.

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