If you are in the market for a new car and you can’t just pay cash for it, you can always choose to finance the car or just lease it instead. But what are the differences between financing and leasing and which one is right for you? Leasing and financing both offer a variety of benefits and drawbacks that you must consider in order to know which option is right for you.

Leasing

Leasing a car is much like renting an apartment. Each month you make a payment that grants you the right to drive the car. Unlike an apartment, there is a set time frame for how long you will have use of the car. At the end of the time period, you must return the vehicle.

If you are someone who likes to get a new car every few years, leasing might be right for you as you can turn in the car and lease a new one at the end of your lease agreement. With a lease, your car will more than likely always be under warranty so any unexpected maintenance trouble should be covered.

There are financial benefits to leasing as well. In most cases, your lease payment will be much less than a traditional car payment, because at the end of the lease you must return the vehicle. On top of that, if you use your car for business at least 50% of the time, your payments can often be deducted from your taxes, saving you a little money in the long run. In some cases, you won’t be required to make a down payment on your vehicle either, making it much easier for you to get that new car you have wanted.

But leasing often comes with many more strict requirements. For example, most lease agreements require that you do not exceed a yearly mileage limit somewhere in the neighborhood of 10,000 to 15,000 miles. Before you decide to lease, you must take a hard look at your driving habits to be sure you don’t go over these limits as you could face stiff penalty fees for exceeding the mileage limit. Lease agreements often allow for basic wear and tear, but if there are any other scrapes or damage you will be liable for the repairs.

When you return the car, you have no equity left and you will be forced to start over from scratch. You usually have the option of paying off the remainder of what the car is worth and keeping the vehicle, but this can cost a lot and may not be worth it based on the present day value of the vehicle in question.

Financing

Financing a new vehicle purchase is the most popular method for buying a new car. When you finance a vehicle, you agree to make payments for a set number of months. This usually averages somewhere in the neighborhood of 48 months to 60 months although many dealers are now offering financing for even longer periods of time to reduce the monthly payments.

The best part about financing a car is that when you are done making your payments, the car is yours. This gives you equity in the form of the value of the car that you can then use to your advantage. You can sell the car or even trade it in for another car if you wish.

The type of loan you can get when financing your car depends greatly on your credit rating. If your credit score is low, you may find it hard to get a loan on terms that you find acceptable. Monthly payments on car loans tend to be higher than on leased cars, depending on the interest rate you were able to get on your loan.

You will most likely have to put at least some money down on your purchase in order to get your loan. This money must come out of your pocket or from a trade-in of an older vehicle. Most loans require a down payment somewhere in the neighborhood of 10% of the purchase price of the vehicle before they will loan you the balance that is remaining.

How do you choose?

It can be tough to decide if leasing or financing is right for you. In the end, which one you choose largely depends on your driving habits and your financial situation. If you prefer to own your own vehicle when you are done making payments and plan to keep your car much longer than your finance terms, then financing is the way to go. If, on the other hand, you prefer to get a new vehicle every few years and don’t mind losing out on owning your own vehicle, then leasing can be an attractive option to consider.

Before you make your next car purchase, consider your financing and leasing options carefully so you can make the best decision, so you don’t find yourself in over your head or with a vehicle that isn’t right for you.