Financing Vs. Leasing a Vehicle

When you're in the market for a new vehicle, you have two purchasing options: financing or leasing. Both will get you a new car quickly; however, the similarities end there. Leasing and financing are two entirely different beasts, and your unique financial and lifestyle situation should determine whether buying or leasing is a better option for you.

Financing a Vehicle

When you finance a vehicle, you are essentially making an agreement to purchase the vehicle from the dealership. To do this, you'll take out a loan from a bank or credit union, who pays the dealership in full for the car. The issuing bank is the official owner of the car until you pay off the loan; should you stop paying your car loan, the bank can repossess the vehicle. Once your loan is paid off, the car is yours to keep.

Leasing a Vehicle

In a lease agreement, you make payments on a car and you can use the car, but you don't actually own the vehicle. Instead, you merely have the right to drive the car for an agreed-upon term, which is usually two to four years in length. During this time, you must abide by specific mileage limits and properly maintain the vehicle; failure to do so will result in additional charges at the end of the term. When your lease is up, you have the option to purchase the car or begin another lease with a new vehicle.

Lifestyle Issues

The intended use for your vehicle plays a big role in whether you'll choose to lease or finance the car. If you have a long commute to and from work, buying a car would probably work best for you, as any cost savings you'd realize by leasing the vehicle would be nullified by the excessive mileage you'd incur. This is also true if you plan on taking a lot of trips out of town with your new car. On the other hand, a quick commute may lend itself to a lease since you won't be at risk of going over your mileage.

Financial Issues

If you want a new car, but are a little short on cash, a lease may be a better option than financing. A lease will be better right off the bat in this instance since a lease requires a small down payment, if one is even required at all. Financing a vehicle, however, requires a significant down payment; car buying site Edmunds.com recommends a down payment of 20 percent on new vehicles. Furthermore, no matter how much money you put down when financing a vehicle, leases almost always have lower monthly payments.

Credit Issues

As is the case with any type of borrowing, credit problems can keep you from qualifying for automobile financing or leasing. However, according to CarsDirect.com, it's harder to qualify for a lease than it is to qualify for a car loan if your credit is less than perfect. This is because leasing lenders have higher credit standards for borrowers. Furthermore, buying a car allows you the opportunity to put down a large car payment to demonstrate your ability to pay for the vehicle. In either case, a blemish-free credit history can save you hundreds of dollars in interest.