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Ready for a new car? Whether it’s your first or your fifth, getting a new car can be an exciting prospect. But you’ll have to make a few important decisions before you start shopping around. Aside from deciding on which car to get, the biggest choice you’ll have to make is whether to purchase or lease.
Weighing the options between leasing or buying a car at a car dealership

Ready for a new car? Whether it’s your first or your fifth, getting a new car can be an exciting prospect. But you’ll have to make a few important decisions before you start shopping around. Aside from deciding on which car to get, the biggest choice you’ll have to make is whether to purchase or lease.

Which is a more financially savvy decision? Which is better for your credit score? Consider these factors in determining the most practical choice for your finances, your lifestyle, and your credit.

How Will The Monthly Costs Differ?

You’ll generally end up with lower monthly payments when you lease instead of take out an auto loan. This is one of the biggest advantages of leasing a car—a lower payment could provide you with more disposable income each month.

What you sacrifice for lower payments is car ownership. With an auto loan, you own your vehicle outright once you’ve paid it off. Once it’s yours, you will not have to make another monthly car payment until you finance another vehicle, giving your budget a serious break.

How Will The Down Payment Differ?

Another financial consideration is the down payment you’ll be required to make. Typically, a lease will require a smaller down payment. If you don’t have a lot of cash set aside for a car, you may be better off with a lease.

If you buy a car,  you’ll benefit from having a larger down payment  ready. Most experts agree that having at least 20% of the purchase price available for a car down payment is ideal. A down payment of this size will help you get better terms for your loan, and it will significantly reduce the total interest you’ll pay over the life of the loan.

How Much Will You Drive Your Vehicle?

What’s your driving lifestyle? Do you take road trips on the weekends and chauffer the kids to soccer practice or piano lessons during the week? Or maybe you live close to the office and only drive a few miles each week. When you buy your own car, you can drive it as much or as little as you want.

A lease agreement, on the other hand, typically limits how many miles you can drive. Once you reach this designated limit, you could be charged anywhere from 15 to 25 cents for every mile driven thereafter. These charges can add up quickly. To give yourself more breathing room, you can purchase additional miles upfront when you negotiate the lease. You’ll still have to pay for the extra miles, but you’ll have more flexibility to take that impromptu trip to the beach or the mountains without worrying about the additional miles you’re putting on the car.

How Long Do You Plan On Keeping The Car?

If you like having a new vehicle every three years, leasing instead of buying a car may be ideal for you. Lease terms usually last for three years. Once that time period is up, you can choose a new car to drive and enter into a new agreement. There is no worrying about having to sell or trade in your vehicle for a decent price when you’re ready to buy a new one.

How Will Maintenance Costs Vary?

In order to take care of your vehicle properly, you’ll need to pay for regular oil changes, tire rotation, and other routine maintenance whether you purchase or lease. Auto leasing companies charge drivers extra wear-and-tear fees if the car isn’t returned in prime condition, so this isn't an obligation you should neglect just because you’re leasing. The fee is usually limited to three months’ worth of lease payments, which can easily translate to over $1,000.

If you’re leasing or purchasing a brand-new or relatively new car, major repairs should be covered by the manufacturer’s warranty. But if you buy the car, you will be responsible for repairs not covered by the warranty. With a lease, however, you may not have to deal with repair expenses at all. Often lease agreements include full warranty coverage, leaving you on the hook for routine maintenance only.

What Happens To Your Credit Score When You Buy Or Lease?

Whether you choose to lease or finance, on-time monthly payments will benefit your credit. Over time, this may give your credit a boost; 35% of your FICO® Score is based on your payment history.

Both leasing and taking out an auto loan also contribute to your credit score because, in either case, you’re diversifying your types of credit accounts. Both will appear on your credit report as an installment loan. This type of account differs from a credit card, which is known as a revolving line of credit.

How Your Credit Can Influence Your Decision

Before you apply for an auto loan or a leasing agreement, be sure to check your credit. You’re more likely to need a good credit score for a lease. Otherwise, you may not be able to qualify for an agreement.

You can still get an auto loan even if your credit isn’t excellent, especially if you have a large down payment. Just keep in mind, the lower your credit score, the more you’ll pay in interest and fees for both options.

Also, if you’ve never bought a car before and don’t have much of a credit history, keep in mind you’ll still be perceived by lenders as someone with less-than-desirable credit. This means favorable leasing terms will be challenging to secure, and you are more likely to end up with a higher-interest-rate auto loan. If you do have good credit, you’ll be more likely to get favorable terms whether you lease or finance your car.

Both leasing and purchasing have pros and cons, but one should offer more advantages, depending on your budget and driving lifestyle. By taking a few minutes to consider the questions raised in this article, you’ll be on the road to acquiring your new vehicle the way that works best for you.

This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.