There are quite a few differences between financing a car and leasing one. Don’t worry! We’re here to guide you through the fog and help you with your next big vehicle purchase.
Car Buying
Buying a car is likely to be one of your biggest purchases – they aren’t cheap! If you don’t pay the entire amount in cold hard cash, you typically borrow from an auto lender. Once you find a vehicle that you want to buy, you’ve got to find a lender to work with to get the car loan you need.
When you finance a vehicle, you typically pay it off in a few years, with most loan terms between 48 and 84 months. The amount you borrow is divided into monthly payments. The more you finance, the higher your monthly payment.
While you’re paying on the car, you have ownership rights, and so does the lender. You can drive it as much as you like, customize it, knock it around – it’s your vehicle. But until you complete the loan, your lender can repossess the car if you default or miss too many payments.
To finance a vehicle, you must first find an auto lender. Many borrowers go to their credit union, bank, or through a dealership’s finance department to get financing. But you don’t get to borrow that money for free. When you borrow from a lender, you usually pay interest on the balance of the loan.
Generally, your credit score determines the interest rate. If your credit score is less than perfect, you’re likely to pay more in interest charges, because you're charged a higher interest rate than someone with good credit.
There are a few other costs to consider when you’re buying a car, as well. Be prepared to pay for full coverage auto insurance, title and license fees, a dealer’s documentation fee, and a down payment (depending on your credit history), which may all be required by your lender.
Once a car loan is paid in full, you can choose whatever auto insurance you like as long as it meets your state’s minimum requirements. While you’re financing or leasing, you’re required to maintain full coverage car insurance, which is more expensive than minimum coverage.
One of the biggest benefits of financing a vehicle is that you earn equity. Equity is the difference between how much you owe on the loan, and the car’s cash value. If you owe less on the loan than the estimated value the vehicle would sell for, you’ve got equity. This difference can be put toward future car purchases in the form of trade-in equity when you’re buying your next vehicle.
Additionally, auto loans that are reported to the credit bureaus give you the opportunity to repair or build your credit if you keep up with the payments.
Car Leasing
Leasing a car is a different ball game, and it's normally only available to borrowers with good credit scores.
Most lessees are looking to drive a new vehicle with a smaller monthly payment. It’s different from financing, in that you’re only paying for the time you have it – not the full value of the car. Most leases typically last from 24 to 36 months, depending on the leasing company, and your personal preferences.
Once you get approved for the lease, the monthly payments are based on the difference between the capitalized cost (cap cost) and the estimated value of the vehicle at the end of the lease, plus the money factor (the interest rate in a lease), divided by the number of monthly payments. The cap cost includes:
- Negotiated selling price of the car
- Acquisition fee
- Title and license fees
- The dealer’s documentation fee (doc fee)
Once the lease term is over, you return the vehicle to the leasing company. Often, you’re given the option of purchasing the car, as well, and this price is also set ahead of time and listed in the lease.
If you decide not to purchase the vehicle, you’re usually free to walk away once you’ve paid the termination fee. However, if the car has excessive wear and tear, or you go over the mileage limit, you’re likely to be charged.
Here are the main differences if you’re considering leasing instead of buying:
- Your name isn’t on the leased vehicle’s title
- Lessees are rarely required to make a down payment
- Leased cars have mileage limits
- You may be required to pay a refundable security deposit
- Lease payments are generally lower than financing a vehicle
This is a key difference; when you lease, your name isn’t listed on the car’s title. This means you normally can’t use any vehicle equity as a down payment on your next car purchase or lease. However, some automakers offer incentives to lessees to continue leasing with loyalty programs and special deals.
While there are a handful of differences, financed vehicles and leased cars have some similarities. If you lease, prepare to pay for full coverage auto insurance, title and license fees, and a dealer’s doc fee – just like financing. Additionally, a good payment history on a lease can build or repair your credit score since leases are reported to the credit bureaus.
Car Options for Bad Credit Borrowers
If your credit score isn’t spick-and-span, you may not qualify for a lease. Many leasing companies only approve borrowers with great credit scores. However, there are plenty of auto lenders that work with bad credit borrowers.
Financing through a bad credit lender gives you a better chance of getting an approval. If you’re in the market for your next car and are struggling to find a lender that can help in your situation, work with us!
At Auto Credit Express, we’ve created a nationwide network of dealerships that have special finance departments. These dealers are signed up with subprime lenders who look at more than a borrower’s credit score to make their loan decision.
To get started with us, complete our fast auto loan request form. The best part? It’s free! We’ll look for a dealership in your local area that has the lending options you need to get into your next car loan.
