calculating car payment

Car loan vs Car lease

Shopping for a vehicle can be a stressful experience, especially if you’re new to it. There are, after all, so many options to choose from. Should you lease a vehicle for a few years, or finance one? New or used? Red or silver?!?!

Today, we’ll go over the differences between leasing a car and getting a car loan to show you the benefits and disadvantages of each.

The biggest differences are going to come from what you’re paying for, what you're paying towards, and your responsibility towards the vehicle in question.

Let’s break it down.

Car loan:

If you decide to finance the car, you’re setting up a relatively short-term payment plan to eventually own the vehicle, keep it, and modify it as you see fit.

In terms of payment, the more you can provide as a down payment to the lender, the less you’ll have to pay over time in order to own the vehicle outright. The longer your loan, the less your monthly payments, however, longer loan terms mean you’ll be paying more in interest cumulatively. You will also be required to pay any applicable taxes and registration fees.

Repaying your loan so you can own the car you’re driving will typically be more expensive than the monthly bill to lease one because you're paying back the total cost of the car. 

With a car loan, you’re able to sell or trade in your vehicle whenever you want. The money you make from the sale of the vehicle can go towards paying off the remainder of the loan if there is still an outstanding balance. Always remember, however, that a car is a depreciating asset that may not be worth its initial loan value.

You don’t have to worry about wear and tear on the vehicle because it’s yours. You should always consider the condition of your vehicle for its resale value, though.

Car lease:

With a car lease, you don’t own the car and you will never own the car (sorry if that sounds harsh!). You’re essentially renting it for a specific length of time, as per the legally binding lease agreement. You can think of it like you would an apartment lease, where you landlord (the lessor) allows you to use their property in exchange for a monthly payment.

At the end of the car lease term, you can decide whether to return the vehicle or purchase it from the lessor.

To drive the leased car away you’ll have to pay the cost of the first month, a security deposit, a down payment, plus taxes and registration fees.

Lease payments are usually more affordable than car loan payments because you’re only borrowing the vehicle. You'll need to prove yourself as trustworthy through a credit check and any previous history you’ve had on your auto insurance or leasing file.

If you’re thinking about ending the lease before your term ends, there will be termination fees involved, sometimes totaling the amount left on the lease.

In terms of the vehicle itself, this is not your car. Any excessive damage or wear and tear on the vehicle will usually come with penalty fees.

Lastly, a leased vehicle may have a limit on how much mileage you can put on the engine and motor annually. Extra charges could accrue should you pass these established limits.