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The Pros and Cons of Car Financing vs Leasing

by Traci Benoit
March 21, 2009

It would be great if everyone could buy a car with cash whenever they needed to purchase a car. However, very few people are able to purchase a car this way. If you can't purchase a car with cash, you can:

  • Go without a vehicle. This is a big savings on gas, car maintenance and loan payments.
  • Take out a car loan. This means paying fees and applying for a loan. Only people with average to good credit are eligible for car loans at good rates, but it allows the buyer to own the vehicle after the payments have been made.
  • Lease the car. Leasing a vehicle also means fees, but the upfront and monthly payments are smaller than with a financed car purchase. After the payments have been made, the car goes back to the car dealer.

A car loan is the traditional way to finance a vehicle purchase, and it's the most straightforward way to proceed most of the time. But, the loan option isn't the best one for every car buyer. There are some advantages to financing a car purchase with an auto loan, including:

  • You build equity in the car.
  • You no longer have to pay once the loan payments are completed.
  • After the payments are completed, you can sell the vehicle or trade it in on a new one.
  • You have no limits on how many miles you can drive.
  • Your car insurance rates may be lower with this arrangement.
  • You can modify the vehicle any way you like without the restrictions usually imposed by some other financing options.

But, there are also many disadvantages to financing a car purchase with an auto loan:

  • The monthly payments are generally higher.
  • You need a down payment in the form of either a trade in or cash.
  • Your vehicle will quickly lose value, depreciating immediately after purchase. It may be worth very little by the time it's paid for.
  • After the car is paid for, the maintenance costs may be higher because of its age.

Leasing a car is another way to finance a vehicle. Leasing is a way of paying for the use of the car as well as its depreciation instead of buying it outright. The advantages include:

  • Smaller monthly payments
  • Smaller down payments are needed
  • Lower expenses because the vehicle is generally covered by a maintenance plan and a warranty
  • Leased vehicles offer businesses better tax deductions.

There are also a few disadvantages of leasing a vehicle:

  • You can't modify the vehicle as you like.
  • You will have mileage restrictions in place.
  • You will not build equity in the vehicle and have to give it back after the leasing term is over.
  • You can't break a lease without paying a penalty of up to six payments.
  • Once the term is over, you are without a vehicle and have nothing to show for the many payments that were made.


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