Credit Karma Tidbit #6: Buying vs. Leasing a Car

It’s time for you to replace the car you’ve been driving around since high school. It’ll be sad to say goodbye to “The Silver Bullet” (or whatever you’ve nicknamed your vehicle), but now you’re faced with your next important decision: Should you get an auto loan or lease a car?

Some people are able to save up the cash to pay for a new or used car outright, but many of us will be paying for a lease or loan for several years. In fact, four in ten of us are currently paying on an auto loan, according to the latest Credit Karma data.

One great thing to note is that both options, whether you lease or buy, can help you build your credit. But there are also several differences between the two financing options. Here are some helpful guidelines to get you started.

You might want to get an auto loan if…

...you’re living well below your means. By taking on an auto loan, you’re likely taking on a higher monthly payment than a lease. Make sure your budget can take the new expense without squeezing too tightly. Figure out where you can cut back to make way for your new monthly obligation.

…you’ll happily drive the same car for years. If you want to invest in a reliable car you’ll keep around for years, buying your car is the way to go. Once your car is paid for, you’ll be free of car payments and own the car free and clear. You’ll also be able to sell the car at your own discretion.

…you have some cash saved up for a down payment. In addition to a higher monthly payment, buying a car will typically require a down payment unless you have excellent credit. A down payment isn’t all bad; you’ll start hacking away at the cost of the car, but it’ll be a large chunk of change out of your savings.

…you want to build equity in your vehicle. As you approach ownership of your car, you’ll build up some trade-in or resale value. This can come in handy as a down payment toward your next vehicle, or a nice return on your investment if you no longer need a car.

You might want to lease a car if…

…you’re a small business owner. Car leases are tax-deductible for small business owners. Even if you’re self-employed, you can write off your leased vehicle.

…your car of choice costs more than $30,000. Many banks won’t lend more than $30,000 for a car loan, so it might not be possible for you to buy the car of your dreams. Start your research at Edmunds to see how much you can expect to pay for your car. If it’s over $30,000, either reconsider the vehicle or look into a lease.

…you like the idea of having a brand-new car every few years. Leasing a car is kind of like renting for an extended period of time. The cost you pay each month basically covers the depreciation of the vehicle over the time you’re driving it. So after your lease term is up, typically three to four years, you’ll have the option to return it and lease a brand new car. You also sometimes have the option to purchase the car you’ve been driving for its depreciated resale value.

…you drive an average amount of miles each month. Your lease will have mileage stipulations on it, and you’ll end up paying additional fees if you go over in your lease payments. If you use your car a lot to commute or travel, leasing might not be the best choice for you.

Your new car and your credit score

Whichever route you choose, your credit score stands to benefit from your decision. Initially, the hard inquiry from applying for a loan or lease will knock a few points off your credit score. However, like other installment loans, such as mortgages and student loans, your credit will benefit from the additional credit line and your responsible, on-time payments.

Where your credit stands to lose is if you get in over your head. If you find it difficult to maintain a budget and make on-time payments, your credit health will suffer. Set up automatic payments to make sure you don’t miss even one payment.

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