Auto Loan Borrowing vs. Leasing

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There are two ways to finance a car: with an auto loan or by leasing. Each option has its pros and cons. Here’s what you need to know about both!

What is an Auto Loan (Borrowing)?

Auto loans are the more commonly used method for financing a vehicle in the United States. With an auto loan, you’re required to borrow money and pay it back in installments over a set period of time.

PROS of using an auto loan:

  • Unlimited use of mileage. When financing a car with an auto loan, you can drive as many miles as you want. When it comes to leasing, you have limited mileage.
  • Build up trade-in or resale value. As long as you’ve paid your auto loan on time, you’ll have trade-in value when you purchase fresh wheels. With leasing however, you do not receive any money back.
  • No risk of possible lease end charges. If a vehicle was financed with a loan, you won’t incur leasing related fees or charges.

CONS of Auto Loans:

  • Typically higher payments than leasing: With an auto loan, you are responsible for financing the majority of the vehicle’s purchase price. This typically means you’ll have larger monthly payments than leasing.
  • You are responsible for trade-in/selling: With an auto loan, you are responsible for trading-in or selling the vehicle. With a leased vehicle, you just have to return the car once the duration of the lease has expired.
  • Post-warranty repair costs: Once the warranty ends on your car, you are required to pay for any repair costs that may come up. On the other hand, repairs on leased vehicles are often covered by the manufacturer’s warranty.

What is Leasing?

Leasing a vehicle grants you use of the vehicle for a certain period of time at an agreed monthly payment. Typically, leases are between two to four years. The car must be returned to the leasing company at the end of the term.

PROS of Leasing:

  • Typically lower payments than auto loans. Leasing tends to be the “cheaper” option because payments are determined by the depreciation, interest and taxes.
  • Protection by warranty. Leased vehicles often comes with factory warranties that cover all repairs throughout the duration of the lease. In some cases, you may choose to extend vehicle protection after the warranty has expired.
  • You aren’t responsible for trade-in/selling. Since you do not own the vehicle, you are not responsible for trading in or selling the car. Once the lease is up, just return the car to the company it was leased from.

CONS of Leasing:

  • Must have stable income. Know what you can afford before entering into a lease agreement. You will be responsible for a down payment, monthly payments, and maintenance costs that are not covered by warranty. Some of these maintenance costs may include accident damage, abuse, and/or wear-and-tear.
  • Limited use of mileage. Be aware that most leasing contracts are capped at 10,000-12,000 miles for the duration of the lease. You may be able to increase that mileage, but it will cost you a higher monthly payment.
  • Spending more than auto loans. In some cases, all the added costs of leasing (extra mileage, accident repairs, etc.) will end up being more expensive than an auto loan.

Make the decision that is right for YOU!

It is definitely worthwhile to weigh your options according to what financing option is right for you. Whichever option you choose, make sure it is the right option for you financially! And if you’re ready to apply for an auto loan, visit MyGenFCU.org/Auto to get started.