Visiting your neighborhood dealership to explore new or pre-owned vehicles is always exciting. However, if you are in the market for a new ride, you need to decide how to pay for it.
The two common choices are leasing vs. financing a car. Although both options can lead to car ownership, they are different, each with its pros and cons. Understanding how each payment option works empowers you to decide whether leasing or financing aligns best with your vehicle acquisition goals.
Why You Should Consider Leasing or Financing a Car
Whether you need a brand-new model currently in the manufacturer’s catalog or a quality pre-owned vehicle, there are many reasons to consider leasing or financing over outright purchases.
- Cost and budgeting: Few car shoppers have the cash to buy a new or used car off the lot outright. While paying a single lump sum lets you become the owner immediately, it can be prohibitively expensive. Leasing or financing plans allow you to acquire a vehicle while making it more manageable for your budget.
- Improve your credit score: Leasing and financing plans can help you build or improve your credit score. Buying a car with a lump-sum payment typically has no impact on your credit history.
- Plan incentives: Many automakers offer incentives for entering a leasing or financing plan, such as cash rebates, deferred payments, and low- or 0% interest rates. These benefits typically aren’t available to car shoppers who plan on using other payment methods.
What is Car Leasing?
Leasing a car means entering a contractual arrangement between yourself and the dealership to use a specific model. Leasing plans are typically available on all brand-new vehicles on the dealership’s lot. Some may also offer leasing plans on used cars if they have low miles or are recent model years.
Entering a leasing agreement for a car is similar in many ways to a long-term rental plan. When signing a leasing contract, you typically make an upfront payment, then agree to make monthly payments for a set duration, during which you get to enjoy the vehicle.
Every lease agreement comes with its own set of stipulations and clauses, which encompass aspects like:
- How each monthly payment is calculated
- Maintenance requirements and responsibilities (e.g., following set oil change schedules, requirement to visit specific dealerships for service and repair, etc.)
- The maximum number of miles you can drive per year
- The maximum total number of miles you can accrue during the lease duration
- Penalties for exceeding the lease’s mileage counts, missing payments, or missing maintenance schedules
When you reach the end of a lease contract, you must return the vehicle to the dealership. Then, you have two options:
- Let the contract end: You can simply let the dealership keep the car once you have fulfilled your obligations, leaving you free to lease, finance, or buy another vehicle.
- Lease buyout: A lease buyout lets you purchase a car at the end of the lease contract, typically at a reduced rate. The dealership will set the buyout price based on its current fair market value.In some cases, you may consider an early lease buyout. This allows you to purchase the vehicle before the lease term ends. In this situation, the buyout price is typically the remaining balance on the lease plus the residual value, but it can vary depending on the agreement and other fees.
An early lease buyout can be a good option if you’re over your mileage limits, are concerned about wear and tear penalties, or want to avoid potential end-of-lease costs.
Benefits of Leasing a Car
Leasing offers many benefits over a regular purchase. Depending on your needs, it can also be a better option than financing. Pros of leasing a car include:
- Trouble-free driving experience: A leasing agreement typically lasts two to three years, although some can be as long as five years. If you lease a new or low-mileage used car, it gives you access to a brand-new or gently used vehicle during the years least likely to experience mechanical troubles.
- Access to the latest models and equipment: Leasing is an excellent way to drive the latest models and the best trim levels in an automaker’s catalog. It lets you drive more recent and better-equipped cars than you might be able to afford with other payment methods.
- Lease agreement benefits: The dealership or the car’s manufacturer often offers various incentives and benefits to sign a lease agreement, helping sweeten the deal. For example, a lease contract may include free oil changes during scheduled service, reducing the car’s operating costs.
- Covered by a warranty: Most cars available on a lease contract are brand-new or low-mileage vehicles. This means that, in most cases, it may still be covered by the original automaker warranty, allowing you to benefit from free repairs or maintenance if it is the subject of a manufacturing defect or a recall.
Drawbacks of Leasing a Car
While leasing presents several advantages, being aware of its constraints when exploring your choices is essential. The primary drawbacks of car leasing include:
- Lease contract limitations: While lease contracts can differ based on the vehicle and the dealership, they almost universally come with specific terms and conditions that require adherence. A common restriction is the annual mileage cap; surpassing this can result in fines, potentially leading to additional costs.
- Tight maintenance schedules: Most lease contracts adhere to stringent maintenance timelines and requirements. You must service or repair the car at the specified intervals and the preferred service centers or dealerships on the contract. Not complying with these requirements can lead to wear-and-tear charges, increasing your leasing costs.
- Little to no customization: Leasing a car allows you the pleasure of driving new models, but the stipulations of a lease agreement generally mean the vehicle has to be returned once the contract ends.As a result, modifications and customizations are typically off the table. The vehicle should maintain its showroom condition, implying it should closely resemble its original state, accounting for the usual wear and tear.
What is Car Financing?
Financing a car is the most common alternative to a leasing agreement. If the dealership offers financing, it is typically available for all cars on the lot, whether new or used.
Entering a car financing arrangement with a dealership means taking out a loan with a financial organization specifically to buy a car. Typically, dealerships collaborate with local banks or financial institutions, enabling them to provide various rates and promotional offers.
You must usually clear a credit assessment with the dealership’s affiliated financial institution to qualify for a car financing plan. Many dealerships provide alternative solutions, like no-credit financing for those with poor or no credit history.
Upon approval of your credit application, you’ll be presented with a car loan proposal. This will outline the duration of the loan, interest rates, monthly installment amounts, and specifics regarding any other responsibilities.
Auto Loan Terms and Payments
Short-term auto loans spread the payments over four years or less. They allow you to own the car sooner but generally result in higher monthly payments.
If you prefer to pay smaller monthly installments, you can request a long-term auto loan, which spreads them over five years or more. However, you must wait longer before becoming the owner, and long-term plans typically carry higher interest rates, meaning you pay more in interest over the life of the loan.
You can typically negotiate with the dealership or the financial institution until you are satisfied with the terms. After reaching a consensus on the conditions, you sign the car financing contract, make the initial down payment, claim your vehicle, and hit the road. The down payment can be:
- A lump sum of cash, typically a percentage of the car’s price
- A traded-in car
- A combination of the two
Once you complete all payments and pay off the loan, the dealership transfers the car’s title to you, making you the new owner.
Benefits of Financing a Car
Choosing to finance a car can be a better option for you than buying it outright or entering a lease agreement. Here are the primary benefits to consider:
- No limits, terms, or conditions: Unlike a lease agreement, when you finance a car, you aren’t bound by annual mileage caps, predetermined maintenance timelines, wear-and-tear fees, or similar conditions.
You can decide the timing and location for servicing your car and enjoy unlimited driving. Additionally, you can personalize the vehicle to your liking.
- Benefits your credit history: Taking out a car loan to finance a car can help boost your credit score. If you make all payments on time, avoid missing any, and manage your budget accordingly, each repayment improves your credit history.
- The car is yours in the end: Once you’ve made all the payments and settled the loan, the dealership must release the lien and hand over the car’s title to you. You will officially become the vehicle’s owner, absolving you of any further commitments to the dealership and its associated financial entity.
- No obligation to return: Unlike leasing agreements, the only responsibility of a financing plan is to make all agreed-upon payments on time. You do not need to return the vehicle to the dealership if you fulfill your financial obligations.
Drawbacks of Financing a Car
Though financing plans offer numerous advantages, they might not be the perfect fit for every prospective car buyer. Here are some key drawbacks to consider with car financing:
- Value depreciation becomes a factor: Despite securing a loan for a new car, its value will diminish as soon as it exits the dealership. This is especially true for new vehicles, which lose about 20% of their original value within the first year on average.However, financing introduces an extra challenge: if the interest rate is too high, you may end up in an upside-down loan. You will owe more than its initial sticker price if you are upside-down.
- Can be costly month-to-month: Although financing might align better with your financial situation than outright purchasing or leasing, it can still come with a hefty price tag.The typical car loan payment spans from $528 for pre-owned vehicles to $729 for brand-new ones without factoring in insurance. Ensure you can comfortably handle each installment before committing to a financing agreement.
- Maintenance responsibility: While financing means you’ll only gain full ownership once the loan is cleared, the onus of the car’s upkeep falls on you from the get-go. This implies bearing all costs associated with services and repairs as if you had purchased the car outright, which increases the overall cost of owning the vehicle.
Factors to Consider When Leasing vs. Financing a Car
Whether you should consider leasing or financing your next car hinges on several considerations. Reflect on your budget, driving habits, and personal preferences to determine the best route – be it leasing or financing.
- Budget: For those adhering to a tight budget, leasing often presents more cost-effective options compared to financing over the same period. However, securing and fully repaying an auto loan grants you ownership of the vehicle, allowing you the potential to resell and reclaim a portion of your investment.
- Driving habits: Determine your expected driving frequency and annual mileage. If you foresee logging a high number of miles each year, leasing might lose its appeal because of its mileage limits and penalties for exceeding them. However, a lease could be a more favorable option if your commute is modest and you don’t anticipate heavy annual usage.
- Credit score: A good credit score is advantageous for leasing and financing. However, securing a lease agreement can be more difficult if you have poor or no credit. And if you find a leasing company willing to accommodate you, poor credit may significantly increase your interest rate.On the flip side, securing a financing plan is often more feasible, even with a less-than-stellar credit score. Numerous lenders cater specifically to potential car buyers who don’t have an impressive credit history.
- New vs. used preferences: Leasing is ideal for those who prefer to drive the newest and latest models, whether brand new or used. If you’re comfortable driving older or higher-mileage cars, consider financing instead. Older vehicles generally have lower price tags, which translates to a reduced loan amount when financing.
- Customization preferences: If you prefer to drive stock, unmodified vehicles with only the factory options, opt for a lease. It will give you access to the automaker’s latest models and top options.If you prefer to customize your vehicle, financing is likely your only viable option, as leasing includes strict restrictions regarding car modifications.
- Maintenance: Lease contracts frequently include perks and incentives that can ease the burden of maintenance expenses and duties. These might encompass regular maintenance activities like oil changes or tire pressure monitoring, leading to more consistent costs.However, leasing also comes with stipulations regarding maintenance, such as adhering to set schedules or using designated dealerships or service providers.
If you prefer to handle maintenance yourself and have more freedom of choice regarding servicing and repair, consider financing the car instead. While financing a car makes you responsible for all upkeep costs, you can choose when and how to maintain, service, or repair it from day one.
Find New and Used Cars at Hometown Chrysler Dodge Jeep Ram Today
At Hometown Chrysler Dodge Jeep Ram, we ensure you find the perfect vehicle for your needs and preferences. Browse our extensive selection of brand-new Chrysler, Dodge, Jeep, or Ram cars and trucks, or find a high-quality, certified pre-owned vehicle.
Need help deciding whether leasing vs. financing a car is for you? Our financing department is ready to help you find the best payment method for your situation. Regardless of your credit score, we can help provide financing for any of our new or used cars.
If you prefer, we can assist you in securing an appropriate lease deal, allowing you to leave our premises in one of our latest vehicles.
Contact us if you have any questions regarding our inventory or financing services.
