Is Buying or Leasing the Best Option for You?

The most popular way to pay for a car is with a loan. It's pretty simple. You borrow money from a lender and pay interest every month as part of your payment. The interest rate depends on your credit score: The better your credit, the less you pay in interest. You pay off a loan over a certain amount of time, 24 to 72 months or more, and at the end, you own the car outright.

Some advantages of a car loan

One of the biggest benefits of a car loan is the fact that you are creating personal ownership in the car you're buying. As you make your monthly payments, you're building cash value, or "equity," in that car. That cash value is real money that's in your name, so you can use that money to help buy your next car. When you make your payments on time, you're building your credit score, which helps you qualify for lower interest in the future.

Disadvantages of a car loan

Depending on your financial situation, one of the big downsides of a car loan can be the need for a sizeable down payment. It's not that a lease doesn't usually require money upfront: It does. But the initial payment is nearly always more for a loan and some people don't have the amount that's required. What's more, the monthly payments are nearly always higher for a car loan and some people don't have that much available every month.