Getting a Car Loan vs a Lease – The Pros and Cons

Getting a Car Loan vs a Lease – The Pros and Cons

If you’re considering purchasing a vehicle, then you’re probably also considering your payment options? You may have heard about Leasing or Financing, but what does that really mean and which is the best financial option for you?

Before you can decide on how you will pay for your new car, it’s important to understand the basics so that you can make a sound decision.

Terms:

Leasing – When you lease the car from the dealership/manufacturer, you are borrowing or renting the car. You do not own it. Lease agreements are typically 48 months (4 years) long. Lease payments are usually lower than finance payments because they are calculated on a portion of the vehicle price since you are only a partial owner. The dealership/manufacturer owns the other portion of the vehicle. At the end of the lease term, you have to return the vehicle (and pay any damage fees) or buy the vehicle for the remainder of the price.

Pros:

–    Can drive a new car every four years

–    Lower monthly payments

Cons:

–    Have to return the car after four years and start the process again

–    Has to stay within the kilometer limits of the lease agreement (ex: 24,000km/year)

–    Has to pay fees on any damages occurred to the vehicle during the lease

–    If considering to buy the vehicle at the end of the lease, has to arrange for lump sum payment or arrange new financing options on a depreciated model

–    Has to maintain vehicle up to the dealership/manufacturer’s service requirements (may require to service vehicle at the dealership only)

–    Limited to new vehicle pricing – Most dealership/manufacturers do not offer leasing options on pre-owned models

 

Financing – When you finance or get a car loan, you own the car. You can get a car loan from the bank, the dealership, or online lenders. The benefits of using online lenders such as Car Loans Canada or  Carloans.ca is that you can apply online from home and shop for the best rates and terms that work for you. When you get a car loan, you are borrowing money to pay for the vehicle over a certain amount of time. As the borrower, you agree to repay the loan with interest in monthly payments until the loan is paid in full.

Pros:

–    You own the car

–    Have the option to choose between new or pre-owned vehicle prices

–    Are not restricted to kilometer limits. You can drive the car as much as you want.

–    Can service the vehicle at the shop of your choice. Does not need to be at the dealership.

–    Building your credit score. By making your car loan payments over time, you are building good payment history for yourself, which accounts for 35% of your credit score.

Cons:

–    Slightly higher monthly payments (However, most of the time, car loans are open loans so that you have the option to make extra payments and pay off the loan faster)

 

Principal –  The principal amount is the total sale price of the car. On a car loan, the principal is the amount that is borrowed. This amount can include any dealership fees and extra options that you may want to add on the vehicle (ex: leather protection or loan insurance)

 

Interest Rate –  The lending party charges a percentage on the amount that is being borrowed. This percentage or rate can be determined by several factors, such as the lender’s prime rates. Also, the person borrowing can have a good credit score or bad credit score, which can determine the interest rate on the loan. If you have a high credit score and have a good income, then you can qualify for prime interest rates (best rates).

 

Term –  The duration of time that has been agreed to repay the car loan.

 

Do your research before committing to a Lease or Finance agreement. Sometimes a Lease may work for someone but be wrong for another person. Make sure you understand the terms so that you can decide on the best financial option for your lifestyle.

 

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