What is car leasing?

Car leasing is a form of financing a vehicle. It is similar to renting a car, but leasing means you’re paying to use the car during the leasing period (which is usually longer than renting), and turning it in when the leasing period is up.

In car leasing, you pay for the use of the car, which includes the vehicle’s depreciation, interest, monthly payments and other fees. Also when you lease a car, your leasing company actually buys the vehicle from a dealership. Your monthly payment consists of a number of calculations but basically, your downpayment, the total cost of the vehicle, and other fees are involved.

Not unlike car loaning, there are also limitations in car leasing, of course. Since you’re basically paying for using the car, you also need to pay for the things that will reduce its resale value. There’s a limit on the car’s mileage, so you can’t drive willy nilly. If you go over the mileage limit, you’ll need to pay extra, so be careful. You’ll also need to pay for the repairs of the car if any wear and tear occurs since it isn’t covered by insurance.

Advantages of leasing a car

Compared to loaning, there are also several advantages to leasing a car over buying one depending on your priorities, especially if you will just need the vehicle for a short term. Not to mention that the cost of leasing the car is cheaper than the monthly payments when you decide to buy one.

If some aspect of your life demands for you to have a car for just a few years, leasing a car is preferable in your situation. Even if you end up liking the car, you don’t have to necessarily give it up. Buying the car is still an option. Also, since leasing periods typically are for a short period of time, you can get to drive new cars after a few years.

Disadvantages of leasing a car

But of course, there are disadvantages in leasing a car. Aside from being unable to own the vehicle, you have to expect some additional charges, especially for the car’s wear and tear parts.

If you exceed the mileage limit in the leasing contract, you also have to pay. And if an unforeseen circumstance renders you to not need the car anymore and you decide to terminate the contract early, the fee would be costly.

What is car financing?

Car financing or car loaning differs from car leasing in the fact that you’re paying to own the car you want, not just to use it. When you apply for a car loan, you borrow money to buy the car you want and pay for it in the terms you discuss with the financial institution or bank you apply to.

What you need to know about car financing

In loaning a car, there are a number of things that you need to know. Are you going to get a secured loan or an unsecured loan? A secured loan means that the bank or any financial institution you’ve borrowed money from (also called creditor) is assured that there’s something to fall back into should you be unable to pay the loan.

Basically, you’ll have to give up something of value to you, which is called a collateral, when you failed to pay the loan. This also assures the creditor that you’ll really pay off your debt, because you wouldn’t want to lose your car or your house, would you? On the other hand, an unsecured loan poses a risk to the creditor.

An unsecured loan doesn’t have the protection of a collateral when you’re unable to pay the loan, so typically this type of loan has a higher interest rate. To apply for this kind of loan, you also need to have a high credit score.

Leasing a car

You should also consider that in loaning a car, you can’t be late in paying your monthly fees. Not only do banks and financial institutions charge a late payment fee, but a loan will also be labeled as a delinquent when you’re unable to pay for a certain number of times which will eventually lead to a default on the loan if it continues. Aside from your car being repossessed, defaulting on a loan will hurt your credit score pretty badly.

Advantages and disadvantages of car financing

There are certainly a lot of things to consider in loaning a car. It has its fair share of cons too, but, one of the advantages in doing so is that you will own the car when you finish paying it off. In the long run, owning a car is cheaper than paying for it to use for a limited time, especially if you’ll need it for life. Isn’t it great to at least get something when you pay? Unlike in leasing a car, you get nothing in the end of the leasing period.

Of course, the downside in loaning a car is that it’s more expensive to pay for monthly fees compared to leasing a car. But in the end, it’s more expensive to cash out your money and do it for several times, rather than paying for a more expensive amount yet actually owning the car in the end. You can also modify the car to your heart’s content if you own it.

So what is better? Car leasing or car financing?

Leasing is preferable if you only need to have a car in a short amount of time, but if you have a family and you see yourself needing a car for a long time, it’s better to buy your own. In terms of value for money, the cost of leasing a car is cheaper compared to the cost of monthly payments in loaning a car. This is preferable if you do not have the means to maintain a car for a long time and do not want to cash out a lot since there’s practically little to no downpayment needed in some cases.

But if you’re worried of long term advantages, loaning is preferable since you’ll get to have your own car for life even it’s expensive as opposed to technically getting nothing at all when you lease. Having to choose between leasing and loaning all boils down to your priorities and situation.