The Big Car Decision: Buy or Lease?

Here is the biggest difference between loaning and leasing: 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. Whether you choose a loan or a lease, understand that you'll pay for insurance, taxes, tags and other fees. You may also be expected to put together a down payment, in both scenarios. So, is it better to buy or lease? Let's look at pros and cons.

Pros

• You choose between a new or used vehicle. You are also free to sell the car at any time.
• 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.
• If you purchase a car in cash, you are not required to pay collision insurance. This could save you hundreds of dollars a year.

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

• Your monthly lease payments will be lower than monthly loan payments on a comparable car.
• When the lease ends, you can return the car, or buy it for a previously determined price (the residual value).

Cons

• You'll may 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.

A loan may be a good choice if you put a lot of miles on your car every year and have a steady income. But, a lease may be your better choice if you drive fewer miles each year, and pay close attention to vehicle maintenance. 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 result: your credit score will suffer and you will lose the vehicle. 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.