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Should You Buy or Lease Car?

Posted by Emma Gordon on March 21, 2019
what is a good credit score to buy a car?

Buy or lease? It’s the age-old question, and one that doesn’t always have an obvious answer. All you know is you need a vehicle to get you to and from work every day — and you need it soon!

Among things like brand, fuel efficiency, and safety rating, the price is one of the most important features of your new vehicle. And whether you buy outright or lease a vehicle plays a huge part in what you’ll pay.

Choosing the right option for your finances isn’t always easy, but here at MoneyKey, we’re all about simplifying complicated issues. Usually, that means streamlining the online borrowing process. Today, it means we’re breaking down the two most popular financing options in hopes of making your choice easier.

So let’s hit the gas and compare what it means to buy and lease, so you know which one’s right for you.

Buying a car — what does that mean?

It’s exactly as it sounds. When you purchase a car, you take over full ownership of the vehicle. That means you get to keep it as long as you want. You can purchase a new car as soon as you have the money, or you can keep it as long as it takes to drive into the ground.

The average price of a new car is $34,000, while used car prices aren’t much better according to USA Today, used car prices rose to nearly $20,000 last year.

Few people purchase their car outright in full because of this cost. As one of the biggest purchases you may make in your lifetime, it’s an expensive investment.

Some people finance a vehicle with a loan

Most people need help making a purchase this big, which is why many turn to a car loan for help. At its most basic level, you could say it’s like any personal loan, including installment loans and lines of credit. After all, the lender agrees to lend money to the borrower, and the borrower agrees to pay it all back, plus interest and other fees.

cash on top of an envelope

Once you dig deeper, however, you start to see the differences, especially compared to the kind of cash loans we offer online.

For one thing, our short-term loans are designed to help you pay for unexpected yet essential bills and repairs you’re unable to cover on your own. It’s inadvisable to use an online installment loan to help boost your purchasing power.

For another thing, car loans are often a secured personal loan. Car loan lenders use your vehicle as collateral. In other words, the terms of the loan allow the lender to repossess the vehicle if you miss payments.

As an unsecured personal loan lender, we don’t require collateral on any of our products. If you’re interested in the requirements we do ask of our borrowers, you may learn more about us here at MoneyKey.

Like most loans, a car loan comes with rates and terms that affect your payment size and schedule. In turn, your credit rating may also affect these rates.

What is a good credit score to buy a car?

If you’re wondering what credit score is needed to buy a car, the short answer is: it depends.

While there’s no credit score that will immediately disqualify you for all loans, a low or poor score may limit your options and force you to take a loan with higher rates.

person holding car keys

According to NerdWallet, most people who purchased a new car in 2017 averaged a credit score of 713 or a good credit score. As for those purchasing a used car, they had an average of 678 or a fair credit score.

If you have a lower score than these two examples, ValuePenguin breaks down the average car loan interest rate by credit score, so you may have a better idea of what you’ll pay.

If you don’t know much about credit, you may also want to check out this primer to help you answer questions like:

  • What credit score do you start with?
  • What is the highest credit score you can get?

When you can answer these questions, you’ll be able to understand your finances better. More importantly, you may have the info you need to decide between financing and a lease.

How does buying a car with a loan differ from a lease?

Lineup of cars parked to buy or lease

Depending on how you look at it, financing a car doesn’t sound too different from leasing a vehicle — at least, on the surface, they both involve monthly payments.

While that’s technically correct, there are other factors in play that mean they’re vastly different options, including:

Ownership: With a lease, you don’t own the vehicle. You’re simply paying to use it for a specific period of time. Once that time period is up, you have the option to buy it, re-lease it, or lease a new one. If you decide against any of these options, you must return the vehicle once your lease is up. Financing, on the other hand, means you’ll own your vehicle once you’ve paid off your loan.

 

Wear and tear: Generally, you’re expected to return the car in a salable condition. If you don’t, you could face extra charges for excessive wear and tear, damages, or customizations. Think of it like borrowing a friend’s car. You wouldn’t return it after you’ve dinged the mirror or painted a decal on the door. Double check with your lease’s terms when in doubt — it might be cheaper to buff out a large dent preemptively on your own. The same goes for damage to your tires, windshield, or bumper.    

 

Mileage: The terms of a lease also affects how much you can drive it. Last year, we looked at some studies to help you answer the question “how much is your commute costing?”. While looking at issues like gridlock and road conditions, we didn’t explore how mileage may impact your costs. Although there are some exceptions, most leases come with mileage limits between 10,000 and 15,000 miles. If you exceed your limit, you’ll have to pay an additional fee for every mile you go over. Meanwhile, there is no limit when you finance.

 

Depreciation & monthly payments: Depreciation refers to how much value the vehicle loses during your lease. While depreciation may affect any asset, it’s most noticeable in the auto industry. A new car’s value may decrease by more than 10 percent within the first month of its sale, and sometimes by more than 20 percent within the first year. After that, generally, for the next four years, vehicles tend to lose an additional 10 percent of their value for every year you drive it.

In general, lease payments tend to be cheaper than payments for a traditional personal auto loan. In some cases, they can be 60 percent lower than financing with an auto loan. That’s because they only cover the depreciation value of your vehicle over the term of the lease while your loan payments pay off the total price of the vehicle.

 

Warranty: One of the advantages of leasing is you’re usually protected by a warranty. This protection lasts as long as your lease does, covering any mechanical problem that isn’t the result of a collision or normal wear and tear.

 

End of term: Once you reach the end your lease, you may buy the vehicle by paying for the remaining cost of the car or give it up to lease another vehicle. Unless you decide to purchase the car, you won’t have equity in the vehicle. In contrast, at the end of your financing term, you’ll own the vehicle. Although you won’t be able to resell your car for its original price, you’ll also have the option to sell it for its remaining value.

A lease may be the best option

Although there is no ‘one-size-fits-all’ answer, a lease is often the less expensive option for most people. Not only are you likely to spend less on your monthly payments, but you’ll also gain a warranty while side-stepping the effects of depreciation at the end of your terms.

A person signing a contract to lease a car

For even more savings, you may want to check out used-cars or certified pre-owned vehicles available to lease. They often come with the same benefits of a typical lease, but they have a lower starting price. You should also make sure to avoid these extra costs when leasing.

How to make your lease fit your finances

Before you sign your name along the dotted line, you’ll want to do some research. Knowing what’s available and what you can realistically afford will help you determine if a lease is an appropriate addition to your monthly responsibilities.

checklist in a notepad

Step #1: Knowing your options

Find out as much as possible about your vehicle

Due to the sheer size of this purchase, it’s wise to know what you want in a car before you start test driving. You should think about what you expect in terms of mileage, safety tests, size, and speed. Each of these things may impact its final cost and knowing how these features may affect your lease could help you choose the right car for your needs.

If you have no idea where to begin, this shopping tool is an easy way to explore your options.

Choose your down payment wisely

As a general rule, paying a larger down payment usually lowers your monthly payments and interest.

The impact of this rule may vary  depending on the interest rate applicable to your lease. Otherwise known as the money factor, the interest rate affects how much you owe as much as the principal sum. If your lease contract promises a low interest rate, the lower interest rate as a result of a larger down payment may not be worthwhile depending on other potential uses of the same money.

If you aren’t sure where you stand, Edmund’s has a helpful guide on whether it may make sense to make a down payment for a lease. It compares a zerodown payment with a $2,999 down payment on the same vehicle to show how there’s only a $70 difference in overall costs. The impact of a higher down payment on the cost of your lease will be similarly small where your lease terms involve a low interest rate.

This may take some weight off your mind especially if money’s tight and paying a large down payment would put the rest of your budget at risk. If the money factor is low, you won’t be penalized too heavily by skipping a down payment.  

Once you have a better understanding of the costs that await you, you’re ready to move on to the next step.

Step #2: Knowing your finances

Check in with your budget

Perhaps the most important step before signing a lease is knowing how much you can realistically afford to spend each month. You’ll have better success with this step if you have a budget.

A budget is a financial tool that will help you keep track of where your money is going — from every paycheck deposited in your account to every purchase you make.

Note that no spending is too small; you should tally the money you spend on gum, streaming services, and takeout just as carefully as the money you spend on utilities, housing costs, and payday loan repayments, if you have them.

Calculator and a pen to prepare a budget

When you can account for every cent, you’ll have a better perspective on your finances — one that may help you figure out what you can realistically afford to spend on monthly lease payments.

According to Gallup, two-thirds of Americans don’t use a household budget — most of whom don’t feel as though they need one. Interestingly, nearly 80 percent of Americans also live paycheck to paycheck. The less expendable cash you have the more a budget may benefit you, as it helps to maximize the value of every dollar by ensuring it’s used on the necessities rather than luxuries.

It’s no secret that budgeting can be boring. It may even be intimidating if you aren’t sure how to start one from scratch.

Fortunately, our ultimate budgeting guide aims to simplify this task by offering three different budgeting techniques:

Choose the one you like best to help determine how much of your paycheck you’ll end up having to spend on your car.

Remember, there’s more to leasing a car than just your monthly payments. From gas to repairs and everything in between, there are a lot of added costs to driving.

Upkeep not covered by your warranty may be a particularly costly expense, so it’s a good idea to budget how much you’ll need for its ongoing maintenance in addition to your lease.

Eliminate unnecessary spending

Your budget will do more than track how you spend your money — it should help you create some breathing room, so you can put more money towards savings. These savings may help you face an unexpected repair following an at-fault collision, or they may help you pay for a tune-up that ends up costing more than your mechanic quoted.

If you don’t have savings — or if you savings fault short of what you need — an installment loan or line of credit may be a suitable backup. With a convenient and fast application process, we offer simple online loans. You may receive yours in as soon as one business day, allowing you to take on urgent repairs without delay.

You also have the support of our Customer Care team that works tirelessly to help support you at any stage of the borrowing process. This team and our dedication to customer service is part of the reason why we’ve earned an 8.8 out of 10 rating on TrustPilot at the time this article was published.

While an online installment loan may help you in an emergency, ideally, you’ll have enough savings to take on these repairs on your own.

Piggy bank to save money and create emergency fund

Building an emergency fund for your vehicle may take some time, but through hard work and dedication, you’ll see your savings grow.

If you aren’t sure how to commit to a plan like this, you may use our guide to help you save more money. With daily, weekly, monthly, and even yearly suggestions, it helps you identify a variety of ways to eliminate spending.

You may also want to check in with our blog for more detailed tips for specific situations. Each month, we share valuable advice on how to control your spending in popular categories — like food, energy bills, and clothing.

If food is one of your biggest expenses, check out these tips to help save you money on groceries. They range from simple cost-slashing tricks you can try in-store to holistic organizational advice to help you prepare meal plans and avoid food waste at home.

Choose to lease or buy depending on your finances

There may be no greater financial duo than an organized budget and a robust savings plan. These tools will help you stay on top of your finances at any time of the year, but they’re especially helpful when you’re ready to make a big purchase — like getting a new or used car.

Leasing may be the most economical way to drive the make and model you want for less, but it’s still a big decision. Don’t overlook what a budget and savings plan can do. From helping you meet monthly lease payments on time to preparing for routine and unexpected repairs, they’ll help you take on these auto costs with more confidence.

When you use every financial tool at your disposal, you’ll find a solution that fits. Remember, MoneyKey is here to help if you need an installment loan to help cover unexpected repairs associated with your vehicle.

 

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see MoneyKey's Terms of Use.

Posted in: Financial Tips Lifestyle

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