Should I lease or get an auto loan?
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UPDATED: Nov 21, 2011
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After you’ve found your dream vehicle and sit down with a salesman in his office, you’ll be asked a seemingly straightforward question: Do you want to buy or lease this car?
In order to provide an educated answer, it’s important to understand what each of these options entail, and what the long-term results for each are.
Leasing a Vehicle
When leasing a vehicle, you make monthly payments to the dealership in order to essentially rent the use of their car out. As a result, you never actually own the car.
Since you don’t pay for the entire car upfront, you can usually get away with leasing a higher-priced vehicle than you would be able to afford with a traditional auto loan. However, since the vehicle is not yours, you must adhere to the dealership’s policies regarding their vehicles. Those policies usually include:
- A limited number of miles—typically around 12,000 to 15,000 a year.
- The requirement to keep the vehicle in good condition—you will be charged for any excessive wear-and-tear.
- The inability to customize your vehicle.
- A steep charge for early termination of the lease.
The plus side is you only take a lease out for 12 to 48 months. That means if you wish to continue leasing, you’re constantly getting new vehicles. However, constantly leasing vehicles means there is a never-ending monthly bill.
Leasing tends to be popular when loan rates are high, and when it proves to be an affordable alternative to paying the entire cost of an expensive vehicle.
Buying a Vehicle
Unless you have cash on hand to pay for a vehicle, you’ll use an auto loan to finance a car purchase. Car loans require a credit check and qualification before getting approved. But after paying a car loan off, borrowers are given full ownership of their vehicle.
Owning a vehicle is important to many for a variety of reasons:
- It allows you to build equity—you own the car and can liquidate it for cash after you have paid the auto loan off.
- There are no mileage caps.
- You may customize it however you would like.
- There is no charge for wear-and-tear—but it may affect the vehicles value.
- Once the car loan is paid off, there are no more monthly payments.
While buying a vehicle requires a much larger initial cost (the cost of the entire vehicle to be exact), auto loans enable vehicle purchases to be possible. The financing they offer allows consumers to build equity and eventually be free of monthly car payments.