When it comes time to get a new car or house, you have three options. You can pay for the item outright with cash, lease it or get financing to purchase it over time. Both leasing and financing require you to make monthly payments, but you can take possession of the car or home right away. Both have many advantages and disadvantages depending on your lifestyle.
Definitions
When you sign a lease, you agree to take possession of something for a set period of time and make monthly payments. For example, when you lease a vehicle, you get to keep it for a set amount of time, as long as you make monthly payments. When you finance something, you borrow money from a lender in one lump sum and use the money to buy a house or car outright. You make monthly payments to the lender to pay off the loan, but you own the item you financed.
Advantages
Leasing is a good option for people who need something less permanent. For example, when you lease an apartment, you can simply move at the end of the lease. Leasing often has cheaper start-up costs. Unlike financing, you typically do not have to put anything down to lease a car. However, financing allows you to own something. By owning something, such as a home, you have equity, which you can use to leverage future loans.
Disadvantages
When you lease, your money only goes toward making the monthly payments, and you don't develop equity. Some people see this as wasting money, since you could be putting your money toward ownership. However, since financing means ownership, you also have to deal with maintenance and repairs. When you finance a car, you typically have to pay for repair costs, but many lease agreements allow you to get free repairs through the leasing agency.
Considerations
Both leasing and financing requires you to make monthly payments. Your monthly payment amount depends on what you lease or finance, your credit score and the leasing agency or lender's requirements. Both leasing and financing can effect your credit score. Making your monthly payments on time and meeting all of the terms will raise your credit score, but missing payments or defaulting on the agreement will hurt your credit score.
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