The process of acquiring a car isn’t the easiest or the simplest. Having a significant impact on your financial situation for years after you sign the contract, buying a car requires a lot of thorough consideration and thought. That’s especially true if you’re hoping to get your first car ever.
Aside from your budget and the car model you’re eyeing, one of the biggest considerations you need to make is how you plan to pay for your car. For a first time buyer, there are a few options. Those are car financing and car leasing.
How can you come to a decision, and which payment option is right for you? Consider this comprehensive guide to find out what will work best for your situation.
What is Car Financing?
Unless you have enough money to purchase your car in cash, your first option is likely car financing. Essentially, what this means is that you’ll have your car financed by a lender. They’ll purchase the car in full from the dealership, and then you’ll pay them off on a monthly basis until you’re able to cover the entire loan amount.
At the end of the contract, you will own the car in full. Of course, the lender will bake an interest rate into your monthly amortization payments, and they will implement fines and penalties for missed or late payments. So in effect, car financing might be slightly more expensive. The good thing though is that all of the payments you make towards your car will result to your full ownership of the vehicle under contract.
Pros of Car Financing
You will own the car at the end of the contract
Once your contract is done and the car is fully paid for, you won’t need to renew a contract or make any more payments
You have the option to sell the car later on to liquidate your investment and turn it into cash
Opportunity to build your credit score, especially if this is your first time taking out a loan
No caps or limits on what you can do with your car. Even during the contract term, the car can be customized and used depending on your unique preferences and needs without restrictions
Cons of Car Financing
More expensive than leasing
Some lenders can be very strict with penalties and fees, imposing steep charges for missed or late payments
Lots of red tape and long application processes for first time borrowers
The car can be repossessed if you fail to follow the contract stipulations, and make result to a severely damaged credit rating.
What is Car Leasing?
On the other hand, first time car buyers also have the option to lease a vehicle. When you undergo a car leasing contract, you pay for the use of the vehicle that you choose. That means you’re paying for the depreciation of the car. On the upside though, since you’re not buying the car, the total amount of money you spend for the time you use the vehicle will never exceed its market value.
When the contract is over, you turn over the keys and have several options. The first is contract renewal. That is, you have the option to sign a new contract to lease the same or a different vehicle for another term. The second is contract termination. You can stop leasing all together and go on your own way. The third is purchase. In this case, the lessor can offer you the vehicle at a discounted cost.
When you’re leasing a car, the lessor reserves the right to place a limit on the use of the car. For instance, you can exceed a certain mileage. That’s because lessors will want to preserve some of the car’s worth. So they will charge you steep fees for exceeding a mileage limit. On top of that, the lessor will not pay for any repairs necessary. So if the car requires tune-ups or repairs while it’s in your care, then the responsibility to pay for those damages is completely yours.
Pros of Car Leasing:
Much more affordable compared to financing
Flexible options at the end of your contract
You’re not tied to your vehicle, so the problem of liquidation is not yours to fuss over
No damage to your credit score even if you issue late payments
Fairly easy application process
Cons of Car Leasing:
All of your monthly payments go towards the use of the car, and not the purchase of the car. So you won’t own anything at the end of the contract.
Limitations on usage, mileage, and customization can put a cap on your freedom to use the car.
Wear and tear will still have to be paid for from your own pocket.
Expensive cost for early termination of contract.
Since you will not own the car at the end of the contract, you will have to keep renewing your contract, so the monthly payments will be virtually endless. This makes it more expensive in the long run.
The Right Choice for First Time Buyers
If it’s your first time buying a car, then there are a few things you need to consider in order to determine whether you should have your vehicle financed or if you should lease. Consider these questions to help you decide on the right payment option:
How do I plan to use my car? – Do you intend to use your car for long distance drives, vacations, and daily use? Then you might want to look into an option that doesn’t limit what you can do and how far you can take your vehicle. An auto lease will put a cap on your mileage, which means you won’t be able to exceed a certain number before the contract is up. However, if you plan to use your vehicle for the occasional drive to the mall and other short distance trips, then a lease might not be a bad idea.
How much can I spare monthly? – Another thing worth considering is the amount of money you’re willing to shell out for your car. Car financing tends to be more expensive up front, so those who have a limited budget will want to stick to leasing contracts. While that might seem practical, you also need to consider the fact that if you choose to lease, then you will end up spending more in the long run. Why? If you don’t own the car at the end of the contract but still need a car, then you’ll end up taking out a new lease contract. This means having to keep paying to rent the car until such time that you finally make a purchase.
How long do I need my car for? – If you don’t think you’ll be staying in the same area after a few years’ time, and you don’t want to grow too many roots that might make it hard for you to transition into a new locality, then you might want to consider something short term. A car lease can be a great way to get what you need while you’re here, and then easily let it go when you need to leave. On the other hand, if you don’t have plans of leaving and intend to grow roots where you are, then financing can be a good choice.
Do I want to start building my credit? – It can be a challenge for young adults to develop a credit score because of the limited resources available. But if you want to get started to improve your eligibility for loans later on, then you should opt for car financing. As a suitable exercise for first time borrowers to flex their capacity to pay, an auto loan can be a really smart way to prove to financial institutions what you’re capable of. If you’re having a hard time finding a suitable lender who can trust your budding borrower profile, then make sure you shop around. There are lots of reliable lenders out there who are looking for diligent borrowers just like you, offering reasonable rates and flexible plans to help you build a suitable credit score.
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Khadija holds a bachelor's degree in business administration. She is a professional writer with 7+ years' experience in the industry. Khadija has a small family and loves spending time with them.