Not everyone can afford to buy a car outright – especially not a new car. This is where loans and leases can come in handy.
A car loan involves borrowing money to buy a car. You then pay this money back in instalments until the cost of the car is paid off. When taking out a car loan, you have full ownership of the vehicle – although a lender may demand that your vehicle be repossessed if you default on payments (this is usually only a last resort option).
A car lease involves renting a vehicle long term. You do not own the vehicle, which means you cannot sell it. However, at the end of your lease, you may have the option to trade your vehicle for a newer one. Just a car bought on a loan, a leased car can be repossessed if your fall behind on payments.
Why take out a loan?
The biggest advantage of a loan is that you physically own the car. You can modify it in any way you want and you can sell it whenever you feel like. You still have to pay off the loan, but you have the option to pay it off faster or refinance it if you want to shop around for better rates.
Loans come with interest, which could mean that you spend more than the value of the car. With some lenders, you may also have to place down a large deposit to get approved. There are auto loan tools online that can help you work out the costs. Having a good credit score will help you to get better deals.
You can use a specialised car loan or a personal loan to pay for a car. Specialised car loans (also known as car finance) are sometimes provided by dealerships and manufacturers, as well as independent lenders – these loans can only be used to buy a car. Personal loans could be used to buy a car, as well as covering other expenses.
Why lease a vehicle?
When you lease a vehicle, you don’t physically own it. You cannot sell the car and often must wait until your lease is up to trade the vehicle in or pay an exit fee. Modifying the car is also not an option. You’ll still have to pay for general maintenance yourself, however certain repairs may be covered by the lease company such as manufacturer faults.
One major advantage of leasing is the ability to renew your lease and upgrade to a new vehicle. Like upgrading a phone, it can be an easy way of constantly gaining access to the latest models without having to pay huge amounts up front (deposits are often much lower than they are on car loans). Meanwhile, while you may be tied into a fixed term for 36 months or more, this could be less than a car loan.
As with a car loan, you’ll need to make sure that you have a good credit score to be accepted. When leasing, you must use specialised car lease companies – you can shop around for such companies online.