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.

Laura Adams, MBA
10-minute read
Episode #520

How to Handle a Car Loan That You Can’t Afford

Let’s get back to Diana’s question about how to handle a car loan that she can’t afford and is upside down. If she sells her car or trades it in, she’ll have to continue making loan payments, so her best bet is to keep it.

One option that may make her payments more affordable is to refinance her auto loan. If she could get a lower interest rate or a longer repayment term, that would reduce her monthly payments.

I’d recommend that Diana contact her lender to discuss the options. If she doesn’t qualify for a refinance because her credit is poor or she lost her job, the lender may be able to suspend her payments temporarily or allow her to pay less for some time. Believe me, any lender would rather work out a deal than to have you default on a loan.

See also: 5 Ways to Get a Loan with Bad Credit

How to Get Out of a Car Lease Early

If you have a car lease that becomes unaffordable, review your contract and speak to the dealer so you understand the full cost of breaking a car lease. Here are three options to consider if you need to get out early:

Option #1: Return the car

Returning a leased car to the dealer before the end of a lease is never wise because you’re still on the hook for payments! Plus, you get hit with additional early termination fees and penalties.

If you don’t make lease payments, it hurts your credit, just like defaulting on a car loan does. So, if you must pay for the car, you might as well keep it and use it.

Option #2: Buy the car

Whether you should buy a car during a lease or at the end of the term depends on what price the dealer offers you.

If the vehicle’s market value is higher than the price, buying it might be a good idea. But if the car is worth less than what the dealer asks, it’s obviously a bad idea to buy it.

Option #3: Transfer the car lease

Transferring your car lease is the best option, but isn’t always a slam-dunk. It’s also called a lease trade and a lease assumption. It’s very affordable and doesn’t hurt your credit.

A lease transfer is when one person takes over the payments of a leased vehicle with the approval of the leasing company and assumes all the rights and responsibilities of the original agreement. The person with the lease is called the seller and the person who wants to assume the lease is called the buyer.

Sites like LeaseTrader and SwapALease allow you to advertise your vehicle and lease to prospective buyers. People who want to get out of a lease are matched up with people who want to take over a lease for the remainder of the term.

Find out what’s allowed under your existing contract. If your leasing company allows transfers, you’ll have much more flexibility if you need to get out early.

Should You Buy or Lease a Car?

If you like the benefits of leasing, it offers a more carefree lifestyle where you don’t have the headaches of ownership. But if long-term cost savings is your primary objective, then you should buy a car and drive it until the repair costs begin to exceed the cost of replacing it.

Remember that leasing is just another form of financing, so it’s still very important to negotiate the price of the car, known as the capitalized cost, just like you would if you were buying it. Focus on the capitalized cost more than the amount of your monthly payment. You can use a Buy or Lease Calculator to help crunch the numbers.

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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.