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Home / Buying / What is The Difference Between Leasing and Financing a Car?

 

The main difference between financing and leasing a new vehicle is who has ownership of the vehicle at the end of the agreed upon term.

Financing – You Take Ownership

Difference Between Leasing and FinancingWhen you finance a vehicle, the bank technically owns it until you have paid off the loan. They have what’s known as a lien, and as a lien-holder, they have a right to the vehicle until the debt is paid. During this time, there are few restrictions on your usage of the vehicle, such as mileage caps or limits on modification. You are given a clear title at the end of the loan term and are free to do with the vehicle as you please. You now own your free and clear.  Of course, you had to take on many thousand dollars of debt to do so, and it may have taken you 5-6 years to pay off the loan, whereas most lease terms are no more than three years.

Leasing – Lender Retains Ownership

When you lease a vehicle, the lender, usually the automaker’s finance arm, takes possession of the vehicle at the end of the lease term. You may even owe them more money depending on the condition of the car and the number of miles that you have driven. Most lease agreements have a mileage cap, along with a per-mile fee if you exceed the cap. So, at the end of the lease, you will be without a vehicle and may have a bill to pay. Granted, you will be given the option to buy the vehicle at a price chosen by the dealership that you return the vehicle to. This is known as a “lease purchase option,” and the price is typically in line with the vehicle’s “residual value,” plus a potential “lease purchase fee.” The residual value is typically set out in the lease agreement, and in many cases, it is actually higher than the vehicle’s retail value – the amount you would actually pay to purchase the same used vehicle from a dealer. So, in some cases, your lease buyout price might not be such a good deal.

Leasing vs Financing a Car – Which is Better?

One point to keep in mind, leasing a vehicle will require a credit score in excess of 740. If you do not have a credit rating of ”excellent,” you will typically be denied a lease. So, for a significant percentage of the population – in the neighborhood of 42% – financing is not the better option, it’s the only option. Because you, can of course, finance a car with bad credit. The interest rates are higher, but it’s fairly common. Financing is typically better for people who want to own their vehicle free of mileage caps or other restrictions. Leasing is typically better for people with stellar credit who want a new car every 2-3 years. The average financing term in the United States is around 60 months, or 5 years. So, if you opt for financing, you must be prepared to keep your vehicle for 75,000+ miles.

Interested in financing? You can get approved online through My Car Lender, a service that matches car-shoppers with lenders who will finance them.

 

About the author: Taylor

 

Taylor is the founder of AutoFoundry.com. He's a seasoned fiction and web writer who has been involved in the automotive industry for nearly a decade. He's currently restoring a 1985 BMW 325e. Email | Twitter | Google+

 

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