Personal Finance

Loan or Lease: What’s the Best Option for You?

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You need a new car, but you’re not sure which financing path to take. After all, trying to finance your vehicle is arguably more important than ever due to rising car prices and inflation.

The two most common options are loan and lease. Each of these options offers distinct benefits and ways to lower your monthly payments. You can also save money each month by refinancing your current loan. Before you rush into a decision, however, it is important that you take some time to understand the big picture.

Here are some pros and cons of loans and leases. Weighing these pros and cons can help you determine which is the right option for you.

Pros of a Loan

You own the vehicle

The biggest difference between a loan and a lease is ownership. When leasing a vehicle, you are renting it for a predetermined amount of time, usually 36 months or less. A loan allows you to keep the car as long as you decide – and enjoy more flexibility. Plus, if you pay off the loan and sell the car, you can potentially get money for it.

Longer loan terms can lower your monthly payment

A lease can’t lower your monthly payment like a long-term loan. For example, if you take out a $35,000 loan at a 5% interest rate with no down payment over a traditional 60-month term, your monthly payment is $660. With a 96-month loan, that monthly payment drops to $443.

When the loan balance is paid in full, your monthly payments end

About those monthly payments again … with a loan, they eventually stop. No matter the length of your loan term, once your loan balance is paid in full, you no longer have a monthly car payment.

You aren’t subject to mileage limits

If you have a lease, you’ll be charged for exceeding milage limits. Typically, dealerships have annual mileage limits between 10,000 and 15,000 miles, although higher mileage limits are also available for an added cost. With a loan, you can take as many road trips as you want.

Cons of a Loan

You may need to sell or trade in the vehicle to get your next car

Let’s say you purchase a vehicle and have buyer’s remorse after two years. Unlike a short-term lease, you are likely tied in for several years with your loan, unless of course you aggressively pay down or pay off your vehicle. That means trading in your vehicle for less value or putting in the work to sell it, which can be time consuming.

Greater commitment to the vehicle

With ownership comes greater commitment to the vehicle you choose. You have the option to have the car for considerably longer than you would with a lease. A longer relationship might be no problem. But for those who like the ability to continuously drive newer cars, the commitment is a drawback.

You may pay more in interest over the life of the loan

Lowering your monthly payment is great, but a long-term loan could cost you more in interest. You pay money each month toward the interest and the principal amount. That means an 84-month loan will have 24 more months of interest payments than a 60-month loan.

Loan terms are longer than leases on average

A typical loan term is 60 months, while a lease is often 36 months or less. This isn’t inherently bad, but you might pay more in interest over the life of the loan. This is especially true if the term is longer, such as 84 or 96 months.

Pros of a Lease

Get a more expensive model with a smaller payment

Because you’re not purchasing the vehicle, a lease allows you to afford a more expensive model with a smaller monthly payment. If your heart is set on a more expensive car, this could be the option for you.

Flexibility to move on to your next car when lease is up

Maybe you’re more of a flavor-of-the-month kind of person. Nothing wrong with that. Having a short-term lease gives you the ability to hop into another car every two years – or whatever time frame you prefer.

Don’t have to worry about trade-in value or selling the car

Since you don’t own the vehicle, you’re not responsible for selling it or trading it in when your lease expires. That will save you time, and possibly money, since you won’t always get fair value for trading in or selling.

Drive the car during its most trouble-free years

You can drive off the lot in a brand-new car, so you likely won’t have to worry much about maintenance and repairs. With a loan, you will probably have the car for a longer period than you will with a lease. That means you might pay more for maintenance and repairs.

Cons of a Lease

Mileage limitations and fees may make it costly

You will have to pay fees if you exceed your annual mileage limits, which are often between 10,000 and 12,000 miles. The fees can range from 10 cents per mile to 50 cents per mile.

Fees are added for any damage beyond normal wear and tear

The fees don’t stop with just mileage restrictions. If you scuff your leather seats, spill coffee, or have door dents and dings, you will have to pay extra fees.

Breaking a lease early could be expensive

Here’s another example of potential fees. Breaking a lease early could cost you thousands of additional dollars, and all that money will be due at once.

You may pay a higher rate of interest compared to a loan term

While a loan often has higher interest than a lease, that is not always the case. If you don’t get financing offers that align with your credit score before going to the dealer, you could pay thousands more in interest on your lease.

This is easy to do since most consumers do not understand how interest is calculated or applied to a lease using a money factor. For example, 0.0025 is equivalent to 6% APR. But without knowing the scale and how it equates, you could pay a lot higher interest rate than you intended.

Weigh Your Options

Axos Bank offers traditional auto loans and auto refinancing, giving you multiple options to lower the monthly payment on your next vehicle.

Loan or Lease: What’s the Best Option for You?

This blog was published by Axos Bank on January 4, 2023, and last updated on January 4, 2023.

Bankrate is an Axos Bank marketing partner.

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