Is It Better To Finance Or Lease Your Car?

Is It Better To Finance Or Lease Your Car?

Decisions, decisions, decisions!

When you’re buying a new car, you’re forced to make a lot of big decisions. From picking out the car you want, looking into different car insurance plans, to figuring out how you’re going to pay for your new vehicle — the car buying process is multi-layered and involves quite a bit of research.

To help you with a portion of it, we’re here to talk about payment methods. When you buy a car, you have multiple options to choose from and depending on what your particular needs are, some might be better than others.

Your first option is to finance your car through a car loan, while the second would be to lease it. For those who might be new to car buying, you might not be familiar with the two options and unsure of which one might be best for you. In our comprehensive guide below, we breakdown what they are and analyse the pros and cons of both of them so you know exactly what to ask for when you walk into that dealership.

Couple financing their car through car loan in Toronto

Financing

When you’re going to buy a new or used car, you might not have all the money lying around to go and buy it on a whim.

Or maybe you do, but you’re not exactly comfortable dropping the $20,000 at one time. For a little assistance, many consumers look to finance their purchase through a car loan. Depending on which lender you go with, consumers usually offer up a sizeable downpayment, while the lender pays for the rest of the vehicle. The two then negotiate a monthly payment plan over a fixed time period, where the consumer is responsible for paying back the lender. Once the consumer fulfills all their monthly payments, the car is officially theirs.

Now there are two types of loans that car buyers can opt for. They include:

Secured loans – a secured loan is the most popular one that people tend to go for. They’re secure because they’re attached to collateral that the lender can leverage in case the consumer becomes delinquent on their monthly payments. In this case, the collateral is the car itself. If for some reason the consumer fails to make their monthly payments, secured lenders are able to repossess the car, resell it and recoup the money they lost. Because of the collateral attached to this agreement, secured loans typically have lower interest rates which appeals to a lot of consumers. While the thought of having your car potentially taken away from you maybe a little unsettling, those who make their monthly payments on time have nothing to worry about.

Unsecured loans – unsecured loans have no collateral to leverage, making it a high risk loan for lenders. Unlike secured loans, if the consumer fails to make their monthly payments, they don’t risk losing their car. Instead, unsecured lenders will typically send a collections agency to recover the money. To try and offset this risk, the application process for unsecured loans are typically a lot more strict. They take a deeper look into the applicant’s credit history and income to help ensure they can actually afford their monthly payments, especially since interest rates on these loans are much higher. With that said, if you want to take full “ownership” of the car right away, this might be the best option for you.

Different Car Loan Lenders

Now that we know what financing is and the two different types of loans available in the market, it’s time to talk about which lenders you can choose from. They include:

The Dealership – if convenience is the name of the game, getting your car loan from the dealership is probably the easiest way to go. You’ll be killing two birds with one stone, getting a car and financing it at the same time. Dealerships typically offer deals from their automaker and sometimes jack up offerings so they can get a bigger cut for themselves. While it may not necessarily happen all the time, it’s best to go in after doing your research and knowing what other competitor interest rates are. That way, you know exactly what you need to negotiate.

Banks and Credit Unions – if looking for something familiar, getting a loan with your bank or credit union might be your first go-to option. Potential applicants like to check these options out first, especially if they have an account with a bank or credit union already. Depending on your relationship with them, they might even offer you premium packages for your car loan. With that said, getting a car loan approved by them is a lot harder as they tend to have stricter application requirements that involve a minimum income and credit score. Those who don’t meet their requirements typically have to look into alternative lending options.

Online Lenders – the beauty of the internet is a lot of information is right at the edge of your fingertips. There are a lot of online lender options that you can look into and compare interest rates with. Carloans.ca is a great option as they work alongside other trusted financial institutions to secure a loan within your budget. Unlike some of their competitors, they work with people from all financial backgrounds, so if you’ve been rejected from lenders in the past, they’ll make sure it doesn’t happen again.

The Benefits of Financing

Financing is a good option if you’re looking to build credit or repair your credit score. Generally, securing a car loan is quite easy which is great if you’re looking to diversify your credit history. If you make your monthly payments on time, not only will it bump up your credit score but it will look good on your credit history as well.

Another important thing about financing is unlike leasing (which we’ll learn more about later), after you’re done repaying your loan, that car is yours! There are no set limitations on that — you can customize your car the way you want to and drive it as much as you want without the worry of breaking contract terms. As you’ll learn later, this is a big no-no with leasing. Even if you decide to resell your vehicle after your loan is fully paid out, that money earned in the resale or trade-in is completely yours to have.

The Disadvantages of Financing

Apart from making monthly payments to the lender, car owners also responsible for paying all their car maintenance fees. This is something people who lease don’t really have to worry about.

Also, if you’re someone who’s constantly on the lookout for the next best thing in automotive, you might be better off leasing. As we’ll see later, those who lease have the opportunity to change up their ride every couple years, which can be very exciting for those who consider themselves car aficionados. Those who finance are stuck with the car they have, and can only change things up if they decide to resell or trade-in.

When you lease instead of finance with a car loan, consumers can drive away with a new car every time their term wraps up.

Leasing

Leasing can be equated to renting. Instead of buying the car, the consumer pays a monthly fee over a fixed time period for the privilege of driving and using that brand new vehicle. The agreement typically states the duration of the lease as well as other stipulations like the cap on mileage and the condition the car must be returned in. Monthly payments are based on how much the car will depreciate over the duration of your lease term. Once that’s up, consumers can return the vehicle and restart the process again with a different car.

The Benefits of Leasing

Unlike those who finance their car, those who lease never have to worry about the depreciation of the vehicle. That worry is handled by the leasing company as they are the ones who are responsible for reselling the car once your lease term is up.

Unlike financing, lease terms also cover the cost of most car maintenance fees, an additional expense they don’t really need to worry about. But perhaps the most exciting part about leasing is having access to a new car after each term is done. You just start the process all over again.

But what happens if you fall in love with a car you’re leasing? By the end of the term, consumers are always given the option to buy out the rest of the car if they want to keep it. However most decide not to for the chance to get their hands on a new ride.

The Disadvantages of Leasing

If you’re a big fan of ownership, leasing isn’t for you. Your monthly payments are going towards something you’ll never own, a thought that can be unsettling for some people. And while some may be content with that, keep in mind that leased cars can also never be personalized. Besides some regular wear and tear, consumers have to return their leased vehicle the way they found it. If you have dreams of doing a special paint job or plans to give your car an upgraded the stereo system, it’s best you look into financing.

Some lease agreements also put limitations on your mileage, so always check the fine print! If you’re someone who’s a fan of road trips or enjoys taking long drives, leasing might not be a good fit.

Leasing vs Financing – Which one is right for you?

Like all big life decisions, deciding whether you want to lease or finance your car might not come easy. It all depends on what you value and what you’re looking for. If you are still unsure which of the two works best for you, here are some things you need to consider:

Ownership – if you want something that’s truly yours, go with financing. Once you finish paying all your monthly fees, you will have full ownership of the vehicle.

Personalization – if you want to customize your car and make it a space that’s truly yours, financing may be the way to go. With leasing, you’ll have to return the car in the same condition that you leased it in.

Depreciation – when you lease, the leasing company has to worry about the depreciation of your vehicle, not you. All you have to do is return your car after the term is over and you can restart the process all over again with a newer model. With that said, it’s important to remember that through financing, once you own the car, the equity of it is yours if you ever decide to resell it.

Mileage – if you’re someone who enjoys long road trips, you’re better off financing your car. Since it will eventually be yours — it doesn’t matter how many kilometers you put on it. Lease contracts on the other hand, typically include limitations on mileage and have fees in place in case you go over that limit.

Monthly Payments – if you’re looking for the cheapest option, leasing is great because monthly payments are typically lower than those paying back their car loan. All you have to do is pay for the depreciation of the vehicle during the time you’re leasing it, plus interest and other fees. Loan payments are greater because you’re actually paying back the entire value of the vehicle with interest.

Now that you’ve carefully weighed out your options, you’re ready to make a decision. Which one is it going to be, leasing or financing? Remember, there’s no right or wrong answer — go with whichever works for you now and the long run. Happy car hunting!

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