When it comes to getting a new vehicle, one of the biggest decisions you will face is whether to finance or lease. Both options allow you to drive away in a new car without paying the full price upfront, but they differ significantly in structure, long-term costs, benefits, and restrictions. In this blog, we’ll explore car leasing and financing in detail and explain why, for many drivers, financing is often the smarter choice.
Understanding Car Financing
Car financing involves taking out an auto loan to purchase a vehicle. You borrow the total price (minus any down payment and trade-in value) from a lender such as a bank, credit union, or dealership finance department. Over the loan term, which typically ranges from 36 to 72 months, you make monthly payments covering both the principal (car price) and interest.
Once your loan is paid off, you own the car outright. This means you hold the title and have full control over your vehicle. So it’s up to you whether you keep it for another decade, sell it privately, or trade it in for your next upgrade.
Why Financing Makes Sense
Ownership is the strongest benefit of financing. After the final payment, your car becomes an asset rather than a liability. You no longer have monthly payments yet still have reliable transportation, which is a significant advantage for your long-term budget and financial security.
There are no mileage restrictions with financing, making it ideal for people with long commutes, business trips, or rural living. You can drive wherever and whenever without worrying about excess mileage fees.
Financing also gives you full freedom to customise your vehicle. Whether you want to tint the windows, install a new sound system, upgrade wheels, or add performance modifications, you can personalise your financed vehicle to match your lifestyle and preferences without violating contractual terms – something you cannot do with leases.
Potential Downsides
The primary downside to financing is that monthly payments may be higher than leasing. You’re paying off the full value of the vehicle plus interest, whereas leasing only covers depreciation and use. However, these payments lead to eventual ownership, unlike leases which require you to restart payments on a new contract at the end of each term.
Another potential drawback is vehicle depreciation. Cars typically lose 20-30% of their value in the first year alone and up to 60% within five years. This affects your resale or trade-in value, but the upside is that after your loan is paid off, you have years of payment-free driving, saving you thousands in the long run.
Finally, as your car ages, maintenance and repair costs increase, especially after warranty expiry. But these costs are usually less than monthly lease payments, especially if you choose a reliable car model and maintain it properly.
Understanding Car Leasing
Leasing a car is essentially renting it for a fixed period, usually 24-48 months. You pay monthly for the use and depreciation of the vehicle during your lease term. At the end, you return the car to the leasing company and have the option to lease a new one or buy the leased car at its residual value.
Advantages of Leasing
The biggest appeal of leasing is lower monthly payments. Because you’re only paying for the depreciation during your lease term (plus fees and interest), payments are significantly less compared to financing the same vehicle.
Leasing allows you to drive a new car every few years, ensuring you always have access to the latest technology, features, and warranty coverage. It can be convenient for those who prioritise driving new models without long-term commitment.
Another benefit is that leased vehicles are often covered under the manufacturer’s warranty throughout the lease term, minimising unexpected repair costs and providing peace of mind.
Downsides of Leasing
However, leasing has significant limitations. The biggest is that you never own the car. Monthly payments build no equity, and at the end of the lease, you must return the vehicle unless you choose to buy it out, often at a higher cost than comparable used cars.
Leases come with strict mileage limits, usually between 10,000-15,000 miles annually. Exceeding these caps results in expensive leasing costs per-mile penalties, making leasing impractical for high-mileage drivers.
You also face wear and tear restrictions. Damage beyond what is considered normal (scratches, dents, interior stains) can incur additional fees upon return, and leasing prohibits customisation. You cannot modify leased vehicles, as alterations may violate the lease agreement or require reversal before return.
Cost Comparison of Financing vs Leasing
Both financing and leasing, require individuals to make monthly loan payments. However, to illustrate the financial difference, consider this scenario:
You want a $30,000 car. If you finance it over 60 months at 5% APR, your monthly payment is approximately $566, totalling around $34,000 after interest. At the end, you own the car, which could still be worth $12,000 if well maintained.
If you lease the same car for 36 months, payments might be around $350 per month, totalling $12,600. However, at the end of the lease, you own nothing unless you buy the car for its residual value (typically $18,000 or more). Choosing to lease again starts the payment cycle over, whereas financing ends payments entirely once the loan is repaid.
What this means is that with financing, you ultimately save money in the long run. Once your loan is paid off, you are free from monthly payments while still having a reliable vehicle to drive. This gives you greater financial flexibility, the ability to invest your money elsewhere, and the peace of mind that comes from true ownership
Is Leasing or Buying a Car Right for Me?
Financing is ideal for:
- Drivers who keep cars long-term. If you plan to keep your car for five years or longer, financing saves money overall because you enjoy years of payment-free ownership.
- High mileage drivers. Financing avoids expensive lease mileage penalties, giving you the freedom to drive as needed.
- People who want to customise their vehicles. Financing allows upgrades and modifications without restrictions.
- Those who want to build equity. At the end of your loan, you own an asset with resale or trade-in value that can go towards your next car, improving your financial position.
Leasing works best for:
- Low mileage drivers who stay within annual limits to avoid penalties.
- People who prefer driving new cars every few years without dealing with resale or trade-in.
- Business owners who can deduct lease payments as a business expense.
When your car loan ends, you own the vehicle outright. You can continue driving it without payments, sell it privately, or trade it in as equity towards a new purchase.
When your lease ends, you return the car to the dealership. You’ll pay any excess mileage or wear fees. If you choose to buy the car, you’ll pay its residual value, which can be higher than market price depending on the lease terms.
How Does Financing and Leasing Affect Your Credit?
Both car financing and leasing impact your credit profile in similar ways because they are reported as installment accounts to the credit bureaus. This means that when you take out an auto loan or enter into a lease agreement, it shows up on your credit report as a form of debt obligation with a fixed payment schedule and end date.
Making on-time payments consistently on either a financed car loan or a lease is one of the most effective ways to build and maintain a strong credit score. Each timely payment adds positive history to your report, demonstrating reliability to lenders. This payment history makes up about 35% of your FICO credit score, the largest factor in the scoring model, which is why auto financing or leasing can be powerful tools for credit building when managed responsibly.
Another benefit is that having a car loan or lease on your report contributes to your credit mix, which accounts for about 10% of your overall score. Credit scoring models favour consumers who have a variety of credit types, such as credit cards (revolving accounts) and installment loans (like auto loans, leases, student loans, or mortgages). This demonstrates to lenders that you can manage different forms of debt responsibly.
The amount you owe compared to your original loan amount, known as your installment loan balance, also plays a role. As you pay down your auto loan balance, it can positively impact your credit score because lenders see that you are reducing your debt obligations effectively. For leases, since you are not paying down a principal balance in the same way as financing, this factor is less influential, but your on-time payment history still boosts your profile.
If you’re curious about your options and want to check your eligibility without affecting your credit score, you can see if you’re pre-approved for financing here. Pre-approval involves a soft inquiry, so it won’t impact your credit and gives you a clear understanding of the rates and terms you may qualify for.
When you’re ready to proceed with a full application, the lender will then perform a hard inquiry on your credit report. This may cause a small, temporary dip in your score – usually just a few points – but this effect fades over time, especially as you make consistent, on-time payments on your new auto loan or lease.
Making regular, on-time loan payments helps rebuild your credit, opening the door to better rates and more vehicle options in the future.
Can You Get a Car Lease with Bad Credit?
Yes, it is possible to lease a car with bad credit, but it can be more challenging to find someone to give you a lease contract compared to financing with poor credit. Leasing companies typically prefer higher credit scores, often above 620-650, as they want to ensure you will make consistent payments and return the vehicle in good condition at the end of the lease term.
At BC First Nations Financing, we understand that not all car buyers have perfect credit. That’s why we offer financing solutions for all credit scores, helping you get into a reliable vehicle while supporting your financial goals and rebuilding your credit along the way. Start the pre-approval process today!
