Car Finance vs. Car Lease: Which is Better?

Buying a car is a big decision, and the process can take weeks if not months. But once you've found the dream ride, the next step is just as crucial - figuring out how to pay for it. Let's face it, not everyone has the luxury of splashing out cash upfront. Thankfully, there are options available, like financing or leasing the vehicle. Now let’s understand what these terms mean and analyze which one would be a smart choice.

 

What’s the difference between car financing and leasing?

• Car Financing: When you finance a vehicle, you are essentially borrowing money to cover the entire cost of the car. You will gradually repay the loan with interest over a specified period of time.

• Car Leasing: Leasing a vehicle is similar to renting, allowing you to drive a new car for a specified period of time. However, there are certain restrictions that come with a lease agreement. These include a kilometer limit, early termination fees, and potential charges for excessive wear and tear upon returning the car. The contract is made with a dealership or leasing company, with a set monthly payment for the duration of the lease. You are responsible for insurance and maintenance during this time. At the end of the lease, you can choose to buy the car or return it to the dealer and lease or purchase another one.

Key differences between car financing and leasing:

 

 

Pros and cons of car financing
PROS:	CONS:
Ownership: You own the car outright and are free to modify or sell it.	Higher Monthly Payments: Monthly payments for car financing are generally higher than for leasing.
No Mileage Restrictions: You can drive as much as you want without worrying about mileage limits.	Depreciation: Cars depreciate in value over time.
Build Equity: As you make payments, you build equity in the car, which can be used to trade in for a new car.

 

Pros and cons of car leasing
PROS:	CONS:
Lower Monthly Payments: Lease payments are typically lower than for financing.	No Equity: You don't own the car, so you won't build any equity or trade-in value.
No Maintenance Worries: Most leases come with maintenance plans that cover routine services and repairs.	Mileage Restrictions: Lease agreements come with mileage limits, and going over them can be expensive.
Drive a New Car More Often: Leasing allows you to drive a new car every few years without worrying about selling or trading in your old car.	No Modifications: Most leasing agreements don't allow for modifications to the car.

 

Which is more cost-effective - financing or leasing a car? 

There are three ways to get a car: leasing, financing, and buying. Each has its own good and bad points. 

Buying a car directly will save you more money in the long run, but you have to pay a lot of money upfront. Leasing a car is a good option if you don't want to own it for a long time. Financing a car gives you more flexibility in your deal. You can negotiate things like the interest rate, length of the loan, and frequency of payments.

In the short term, assuming consistent pricing, interest rates, and down payments, a monthly lease payment is typically over 30% less than a monthly finance payment. However, as the term lengthens, the cost difference between the two options begins to level out, and medium-term agreements tend to have similar monthly payments.

In the long run, financing may be the more cost-effective option compared to leasing.  You will have the freedom to make all the decisions about the car, and there are no restrictions on using it. Although the longer payment period may seem daunting, negotiating a low and agreeable interest rate will compensate for it.

Spotlight: What is Gap Insurance?
Did you know, when you lease or finance a vehicle from a dealership, you may be offered GAP (Guaranteed Asset Protection) insurance? This type of insurance, which usually runs from $300 to $1000 depending on the make, model and purchase price, basically covers the “gap" between what your vehicle is worth and how much you owe on your lease/loan in the event your car is stolen or totaled. If the car you’re leasing is less than three years old and/or you’re getting a pricier luxury model, GAP insurance may be worth your while.

Read more about GAP Insurance: What is GAP Insurance and Do You Need it?

 

How does your credit score affect your loan terms? 

Rates on car loans in Canada normally range from 4.90% to 29.99%, based on a number of variables such as the borrower's income, credit score, loan amount, and lending institution's rules. The rates may vary depending on the lender, the length of the loan, and the borrower's credit history. Generally, borrowers with strong credit and steady income are more likely to receive favorable interest rates than those with weak credit and irregular income. It is advised that you check interest rates from different lenders and pick the one that provides the best deal.

Use our quick and easy credit tool to check your credit score for FREE with what's known as a "soft check", that won't impact your credit:

 

Can you get a car loan with bad credit?

When you apply for a car loan, lenders will use your credit report to determine if you are a reliable borrower. Some lenders may check your credit history themselves, while others may ask you to provide your own credit report. Even if they don't ask for it, knowing your credit score can be helpful.

There is no fixed minimum credit score required to finance a car. Each lender has its own set of requirements and considers different factors, like your income or the type of car you want to buy. 

If possible, improving your credit score before applying for car financing is a good idea. Low credit scores may lead to fewer offers and higher interest rates than someone with a good credit score.

However, you don't have to be disheartened if you have bad credit. Some lenders may be willing to work with individuals who have had bankruptcies, multiple payment defaults, or repossessions in their credit history. For example, Approval Genie has a portfolio of lender partners that work with people who have bad credit, helping them get approved for a car loan and also advising them on rebuilding and improving their credit.

 

Which one should you choose - financing or leasing?

Choosing between car financing and leasing depends on your personal circumstances and preferences. If you value ownership and want to keep your car for a long time, financing may be the better option. On the other hand, if you want lower monthly payments and the ability to drive a new car every few years, leasing may be the better option.

In conclusion, there are pros and cons to both car financing and leasing. It ultimately depends on your personal preferences and financial situation. Consider your budget, driving habits, and long-term goals when making a decision.

Remember that owning a car provides a sense of freedom and convenience, but it's essential to choose the right option that suits your needs.