How Leasing Versus Buying a Car Impacts on Your Credit
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For years, there has been a constant debate over whether leasing a car versus buying a car is better. Nowadays, added to the question of leasing versus buying is whether leasing or buying improves your credit score. Well, in truth, there is no real difference when it comes to improving your score. But when you lease, you’ll require a better score to begin with than with a loan. Both basically work the same and require that you make every payment on time and never be late. Making payments on time is what affects your credit scores. And because there’s no down payment with a lease and payments are usually lower, leases are often considered to be a higher risk. So, if you want to try and lease, a lot will depend on your credit score.
Advantages of Leasing a Car
Generally, when you lease, you make a lower initial payment and lower monthly payment so there are cash flow savings compared to purchasing a vehicle for cash or financing it. You can use those savings to pay down other debts, make investments or use the money for other purposes. The money you save from the reduced debt or the return you make on the investment are part of the financial benefits of leasing. Let’s suppose you’re planning on buying a new car. You drive about 20,000 miles each year and you want to keep the costs down to a minimum. In this case, which is better...a lease or a purchase? Whether you lease or buy a car, you’ll pay for the depreciation on the asset while you drive the car. You’ll also pay the financing costs for borrowing money. In short, the finance company’s cost doesn’t change, whether they lease the car to you or they loan you the money. On the other hand if the lease requires an initial payment of $1200.00 and the finance agreement requires an initial payment of $2,000, the difference of $800.00 could be invested to generate earnings, which could potentially be used to pay off other bills.
Advantages of Leasing
- Leasing usually means a lower down payment than purchasing
- Monthly payments may be less than buying
- At the end of the arrangement, rather than having to sell a car or trade it, you simply bring it back to the leasing agency
Advantages of Buying
- When you buy, you build equity; with leasing you aren’t building any equity
- When you buy you’re not under any constraints about mileage; leasing a car commonly involves extra charges if you drive more than the number of miles specified
- When you buy you don’t have to worry about getting out of a lease before the lease terminates, which can be very expensive
What if You Have a Poor Credit Rating?
There are a number of dealerships that specialize in financing vehicles to people with credit problems, but you will probably pay a higher interest rate than the 9% to 10% national average. With a low credit score, you should expect to pay 12% to 15% or more in annual interest, which translates into paying much more in interest over the life of your loan than the average consumer.
Credit Reports and Leasing
One way that you will impact negatively on your credit report is if you decide to turn in a car before the lease is over. The way your creditors see this is the same as defaulting on a loan so it will have an adverse effect on your credit. But if you turn the car in early and trade it for an upgraded new vehicle, there are no adverse effects on your credit report. So, whether you’re buying or leasing, you’ll be paying interest charges and your current credit score may determine the amount you pay. Overall there are a number of advantages and disadvantages to both options. With leasing you get a new car every three years, though the car is never actually yours. When buying you know the car is yours without any strings attached.
About the Credit Counselors at Straight Credit Counseling
We at Straight Credit Counseling do everything we can to help individuals and families get back on track and totally out of debt. Credit Counseling services offered by Straight Credit Counseling helps individuals repay their debts by using careful budgeting and management of money strategies. A qualified counselor offers advice on how to manage outstanding debt as well as answering various credit questions. If you are ready to improve your credit, the team at Straight Credit Counseling is available to conduct a no obligation consultation. To arrange for a session by phone, please feel free to e-mail us at info@StraightCreditCounseling.com. Contact us today and rest in the knowledge that your credit report will soon be one that you’re proud to present.