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Car Loan or Lease? 6 Tips to Know Which Option Is Best

What's the difference between a car loan and car lease? Here are 6 tips to know which option is best for you.

By
Laura Adams, MBA
10-minute read
Episode #520

6 Tips to Know Whether a Car Loan or Lease Is Best

Now you know that leasing a car means having little or no equity with relatively lower payments. And getting a car loan means having partial equity with higher payments.

As I mentioned, whether you lease or buy them, vehicles are usually poor investments because they depreciate, no matter what. The best option depends on your lifestyle, financial goals, and how you intend to use a vehicle.

Use these six tips to consider your personal preferences and know whether a car loan or lease is best for you:

1. You don’t want to deal with potential car repairs.

A major advantage of leasing is that you don’t have to deal with major repairs because most are covered if you get a lease term that doesn’t exceed the manufacturer’s warranty.

A major advantage of leasing is that you don’t have to deal with major repairs because most are covered if you get a lease term that doesn’t exceed the manufacturer’s warranty. That protects you from having to pay for major repairs; however, you’re still responsible for routine maintenance.

When you return a leased vehicle, the dealer checks for damage and may charge you for repairs. If you tend to be an aggressive driver, consider purchasing an extended lease warranty that would cover parts such as new brakes or tires.

2. You want to drive a new car every few years.

Leasing can be attractive because you get to drive a newer or high-end vehicle, for a lower monthly payment, when compared to the cost of buying it for the same price and down payment. Even if you purchase a car using a low or no-interest loan, leasing is usually less expensive in the short term.

That makes it more affordable to drive a new vehicle with the latest options and safety features every few years. Depending on your lifestyle and occupation, keeping that new car smell with a luxury nameplate might be exactly what you want.

3. You don’t want the hassle of selling or trading in your old car.

There’s no doubt that leasing a vehicle is just more convenient than buying. You won’t have to worry about what to do with your old car when you’re ready for a new one. Plus, if the car is a lemon, you’re not stuck with it.

4. You want to drive a lot of miles.

While there are plenty of upsides to leasing, it comes with downsides as well. A biggie is that you’re typically charged a mileage fee if you drive more than 10,000 to 12,000 miles per year.

Depending on your work and lifestyle, maintaining low mileage may not be possible. When you borrow money to purchase a car, you can drive it as many miles as you want.

5. You want flexibility to change vehicles. 

Another advantage of owning versus leasing a car is that you have flexibility to sell it or trade it in for a new one—even if you have an auto loan. But breaking a car lease is more restrictive and can be expensive. I’ll cover more about that in a moment.

You might be glad to own a vehicle if you...

  • Lose your job and have trouble making payments 
  • Take a new job that requires you to drive more miles that exceeds the leasing mileage cap 
  • Need a minivan because twins are on the way 
  • Want to customize your vehicle 
  • Don’t want to maintain your vehicle perfectly 
  • Have any major life change that doesn’t make a leased car a good fit for you anymore

6. You want to pay as little for a car as possible.

The financial upside of owning a vehicle is that after you pay off the loan, you could drive it for years without a car payment.

The financial upside of owning a vehicle is that after you pay off the loan, you could drive it for years without a car payment. Once a car loan is paid off, a great strategy is to keep sending the same amount of money to a savings or retirement account.

If you can’t afford the higher payments of a car loan, consider buying a less expensive model or a reliable used car. However, you’re taking a risk that your car won’t need any expensive repairs after any warranty that you may have expires, which could easily wipe out the savings you hope to achieve.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.