Auto Loan vs. Lease: Which is Better?

2006-01-12

Around 80 percent of the Americans pay for their car with cash or obtain a loan. Often an auto loan, in some form, is used to pay for their car. Among the remaining group, leasing is by far the most popular alternative. Car lease can be compared to renting a car and you will not own the car yourself. Car lease is more popular among self employed individuals since leasing and purchasing (by paying cash, with a new car loan or with a bad credit car loan) is treated in two different ways by the tax laws. When you purchase a car, you will be allowed deductions for depreciation of the asset and certain other costs linked to the use of the car. With a car lease, the entire cost is treated as a business expense and can be set off against the revenue when you do your taxes.

Car lease is also less capital intensive which can make it a good option for a business that can make better use of its cash by using it to grow instead of using it to purchase a car. Even if the car lease is a more expensive way of obtaining a car, it can still be the best solution since the money will give a higher interest rate when invested in the company then when tied up in a car. This capital growth can cancel out the additional expenses linked to car lease instead of a cash purchase. Car lease can also be a good solution for a company that is planning to relocate soon, since a car can be leased for a predetermined period of time. If you purchase the car, you will have to arrange for the car to be sold or move the car to your new location even if that location is in another state or even in another country. Car lease can however also be less flexible than purchasing a car, since the leasing term is usually predetermined and you can encounter problems if you want to cancel the contract prematurely.

Car lease instead of a new car loan is also popular among those who wish to change car every two or three years and always have a new car. The reasons behind this can be several. A common reason for changing car every second or third year is naturally that the driver wants a new and good looking car to sport. Car lease can be a way for drivers to enjoy luxury models that they could not afford to purchase and pay upfront cash for. Car lease can however also be a way of making sure that you always have the latest safety and technology, or that you can trust your car not to break down and require reparations. Car lease can be a more flexible solution than a 60 month auto loan term. If you want to change cars frequently, a five year auto loan term can cause some hassle every time you want to trade in a car that you still are making payments on. Never trade in a car when you still owe money on your new car loan. A lot of car owners have been tricked by insincere car dealers that have promised to pay off the auto loan within 10 days after receiving the car. A few months later these unfortunate individuals have found out that no payments have been made and that they still owe money on the auto loan. In the eyes of the creditors, and the law, you are still responsible for the auto loan. If you still want to trade in a car with a remaining auto loan, you should make sure that you get everything in writing. This way, you can at least sue the car dealer when he or she does not pay of the auto loan as promised.

Consumers that do not need to change car every second or third year will usually prefer to pay their car cash or with a new car loan. While some people love to change cars as often as possible, others like to find a car that they like and stick to that one for many years. Changing cars frequently is viewed as a hassle rather than something convenient. By paying cash or with a new car loan you will never be bothered by mileage limits, wear-and-tear considerations or other limiting factors that are usually included in the car lease contract. With a cash payment or new car loan, you will however have to pay for all maintenance that would be paid for by the dealer if you had chosen car lease. It will on the other hand be possible for you to build equity and you can use the car as trade in when you purchase a new car.

Even with a poor credit score, you can be offered an auto loan – a bad credit car loan. It is important to understand that your credit score will affect any new car loan. You might be tempted by the 0% APR ads for auto loan that you see when you visit your auto dealer, but if your personal credit score is poor you will most likely end up with a higher APR for your auto loan if you are granted a new car loan or a bad credit car loan, even if you use the car as collateral for your new car loan or bad credit car loan. You should always order a copy of your current credit score before you begin to negotiate a new car loan or bad credit car loan. Keep in mind that a poor credit score can affect your auto insurance rate and when you create your budget and calculate if you can afford the bad credit car loan you must therefore count in these extra expenses as well. A bad credit car loan is more expensive than a standard auto loan, and with the additional insurance expenses it can turn into a quite costly purchase.
Today, you can easily obtain your personal credit score online before you start to negotiate an auto loan or a bad credit car loan. When shopping around for bad credit car loan you should keep in mind that each time an auto dealer or credit company run your score for an auto loan the score will drop somewhat. If you have a good credit score, a few checks for an auto loan will not make any larger difference. If you already have a poor credit score, you should however be careful since even small changes will have an impact on an already damaged credit score. If your credit score is below 550, you should think twice before applying for a new car loan or bad credit car loan. It is better to start repairing your credit score and allow for it to improve before you apply for a new car loan or bad credit car loan.

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