Financing a car allows you to eventually own your vehicle outright. If you choose to lease instead, you could make lower monthly payments and drive a vehicle that’s more expensive than you could afford to buy.
Leasing has become a more attractive option for drivers in recent years, as car prices rise and new car features get more competitive.
A lease comes with less commitment than a traditional auto loan, but you’ll also have limitations on how you can use the vehicle—and when the lease is up, you’ll have to return it to the dealer.
Financing a car is expensive, but those higher payments buy you the freedom of ownership.
Whether you choose to lease or finance your next vehicle, Jerry
can help you find an affordable rate on car insurance
. Download the app, answer a few simple questions, and Jerry will compare rates from top insurance companies to find a premium that fits your budget and needs. If you’re trying to decide whether to take out a lease or get a car loan
for your next vehicle, Jerry has the answers you need. Here are the key factors that make leasing and financing different. What’s the difference between leasing and financing a car?
Leasing a car basically means that you’re renting it for a fixed term.
When you lease a car
, you make regular monthly payments and return the vehicle at the end of the lease period. If your lease agreement included a buyout option, you can buy the car with cash or a loan instead of returning it. Traditional auto financing means that you’re buying a car with the help of a loan from a bank, a credit union, or another lender.
Just like a lease, financing requires you to make monthly payments, but these go towards both the loan principal and whatever interest your lender charges. Once the loan and interest are paid in full, you’ll own the car.
Whether you choose to lease or finance your car depends on your priorities. If you’re looking for a new or expensive car and want to make lower monthly payments, leasing might be the best option—but every lease comes with restrictions on use.
If your goal is to own your car and you want to use it without restrictions, financing is probably the better option.
Lease vs. finance: the basics
| | |
|---|
| First month’s payment, refundable security deposit, acquisition fee, down payment, registration, taxes, and others | Down payment, registration, taxes, and others |
| Lower because you’re only paying for the vehicle’s depreciation | Higher because you’re paying for the purchase price plus interest |
| Choice to return or purchase | |
| Ending a lease early typically comes with steep fees | You can sell or trade the vehicle at any time and use money from the sale to pay off the loan balance |
| Extra charges for excessive wear and tear on the vehicle | Excessive wear and tear decreases your car’s resale value |
| Lease agreement limits annual mileage | No limit on annual mileage | No limit on annual mileage |
| Any customization must be removable | Customization could void your warranty | Customization could void your warranty |
| Only with a buyout clause | Once the loan and interest are paid |
Key Takeaway: Leasing allows you to make lower monthly payments, but it typically comes with restrictions and additional fees. Financing lets you own your vehicle and use it as you choose, but you’ll pay interest on the principal.
The advantages of leasing
The major benefits of leasing are lower payments, which might allow you to drive a more expensive vehicle than you could afford to buy, and freedom from the responsibilities that come with car ownership.
However, leasing also comes with restrictions on mileage, extra fees for wear and tear, and higher up-front costs than financing.
Keep the following advantages in mind when considering entering a lease agreement.
Lower payments
When you lease a car, your monthly payments cover the car’s depreciation—in other words, you pay for the value the car loses as you drive it.
Paying for depreciation is typically cheaper than paying off the full purchase price plus interest. According to CNBC, the average monthly lease payment in 2019 was $487, whereas the average car loan payment is now close to $600
. Maintenance benefits and warranties
One of the biggest downsides of car ownership is worrying about—and paying for!—your vehicle’s maintenance.
If you’re leasing a car, you’ll be driving it during its best years. That means fewer trips to the shop, fewer maintenance costs, and less worrying about the vehicle’s resale value.
Many lease agreements build in the cost of maintenance with free oil changes and other scheduled maintenance. Your car may also be covered by the manufacturer’s new-car warranty.
Access to higher-priced, better-equipped vehicles
Because leases typically cover late-model vehicles, you can expect your car to have all the latest safety features and the best automotive tech.
Leasing a car can give you access to a better vehicle than you could afford to buy outright—and if you choose to return the car at the end of the term and lease another, you’ll have the opportunity to experience a wide range of driving luxury!
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The advantages of financing
Financing a car through a loan is the traditional route to car ownership, and it allows you to use the vehicle exactly as you want to and make it your own, even before the loan term is up. You’ll make higher monthly payments, but in return, you get the benefit of eventual ownership.
Lower overall cost
Even though you pay more each month to finance a car, it’s cheaper in the long term than repeated leases.
Once you’ve paid off the principal and the interest, you can drive the car without any payments, making it a more economical option than repeated leases that require you to keep paying as long as you drive.
MORE: 7 essential tips for financing a car
No mileage limits or wear-and-tear penalties
Because you’re buying the car you’re driving, financing gives you the freedom to use it as you choose.
Unlike a lease agreement, which typically puts a cap on annual mileage and charges extra fees for additional miles or excessive wear and tear, a loan agreement won’t restrict how you drive your car.
Freedom to customize
One of the joys of car ownership is making your car your own.
Want to swap out your boring rims or get a custom paint job? Financing allows you to make decisions about your car’s appearance and performance that would be out of your hands with a lease.
The bottom line
Leasing and financing are both good ways to pay for the car you drive.
Both options come with economic advantages: with a lease, you pay less per month, but financing allows you to drive the car for free once the loan is paid off.
With a lease, you’ll get the pleasures of a new car and potential maintenance benefits; with a loan, you have the freedom to customize and drive as you please.
To decide between a lease vs. finance for your next car, you’ll have to weigh your priorities. Do you care more about owning your car and saving money long-term, or are you interested in lower monthly costs in exchange for a high-quality vehicle?
Choose the option that best fits your interests, your budget, and your lifestyle.
Key Takeaway: The main difference between a lease and finance is that financing a car allows you to own your vehicle and drive it for free after the loan is paid off.
How to find cheap insurance
Whether you choose to lease or finance your next car, you’ll need to buy car insurance
. And you're in luck there—Jerry
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