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Auto Finance: Auto Loan vs. Auto Lease

Unless you’ve been saving up money since you left grade school, the chances are that when it comes time for you to buy a new auto, you’re going to have to apply for a auto loan or take out a auto lease to afford your purchase.

Needing a auto loan can make you feel like you’re taking a huge plunge, but in reality, a auto loan is a great way to build up credit for your future purchases. However, for first time auto buyers, it can seem like to big of a jump to take out a auto loan for the entire price of a brand new auto. And for some buyers, they may not want to be locked into the same auto for 4-5 years, in which case a auto lease may be a better option.

There are huge differences between the auto lease and auto loan process. Both can be confusing, but one will leave you the owner of a auto, while one will not. Buying a auto with a loan means that you own the auto outright once you pay off the entire auto loan balance. Leasing a auto with a auto lease, means you have the right to drive that auto during the lease term, but at the end of the term you deliver the auto back to the dealer. Lease rates and loan rates can vary widely, and it is often helpful to employ a payment calculator when trying to determine which of the two options are truly right for you, but in general your lease payments will usually be lower as you are simply leasing, not buying, the auto. While it may seem easier to lease a auto in the short term, just like renting a house, you have to consider the fact that you’re not really investing your money in a asset that you own.

When you get a auto loan for a new auto, you are borrowing a certain lump sum of money from a bank or other financial institution and agreeing to pay it back slowly over time. Because you are using the bank’s money instead of your own, you are required to pay a certain amount of extra money, called interest, on the total amount of the loan. Loan rates vary depending on your credit history and the amount of cash that you have on hand as a down payment for the loan. If you borrow smartly, you will emerge from a two or three year loan with stronger credit and you’ll be the proud owner of a auto.

If you choose a auto lease instead of a auto loan for your new auto, you will be required to make monthly payments much like the previous scenario. The difference is that these payments are simply the amount you pay the leasing agency to rent the auto. There are restrictions on the type of driving that you can do in the auto and the amount of miles you can rack up while the auto is in your possession. You need to be conscious of the terms of the lease, as if you put too many miles on the auto or return the auto in poor condition, you are responsible for additional fees.

If you really want to own your auto you are better off with a auto loan, but if you like to drive something new every few years, a auto lease may be better for you.