Before you make a big purchase, you’ll need to understand the finance terms if you’ll be using your credit. A majority of Americans don’t have enough cash to completely pay for a house, car, and even smaller purchases like a TV in one payment. That’s why credit was created.
Depending on your credit score, your rates for loans, leases, and financing can be in your favor or in your lenders favor. That’s why you’ll need to understand what you can do to beat the lender with your (soon to be) amazing credit score.
Many lenders use a bad credit score as an excuse to charge more money than they need to for borrowing money. If your credit worthiness is low, they will charge you more since you’re a high-risk customer. But, if you do manage to pay back the loan, they don’t give you back any of the excessive amounts of money you overpaid. That’s why you’ll need to understand the credit mistakes you are making and the credit tips to improve your score.
What is a loan?
A loan is when you borrow money from a lender. This is common when getting a home loan and auto loan. Many people don’t have the money to make a large payment in full, so you can get a loan to buy what you need. You can think of a loan like a giant credit card purchase. You’ll have to sign a contract to pay off that loan. The contract will determine the length of terms, monthly payments and interest rate charged. There may be additional fees for paying off the loan early. You can negotiate some of the terms and you’ll get a much better interest rate if you have a high credit score. That’s why some people are playing against the system by boosting their credit score.
I personally believe that you should never co-sign a loan and you should never ask someone to co-sign a loan for you. That’s a huge request that comes with a lot of responsibility. If you are in a situation where you need a cosigner, see this alternative to cosigning a loan first.
Car Buying: The difference between a loan and a lease when it comes to cars is that loan is for purchasing a car while a lease is renting a car. The lease will require you to make monthly payments that would generally be smaller than making monthly payments on a car you purchased with a loan.
Is a lease better than a loan? Leasing provides the consumer with a lower monthly payment than actually purchasing a vehicle. This means you are renting a car and still subject to additional fees for going over certain mileage restrictions. With a lease, you’ll spend less money up front to get a car, but in the long term you’ll spend more money constantly leasing since you won’t have any actual property. Determining when you should lease or buy comes to these two factors:
Short term: leases are better than a loan for lower monthly payments.
Long term: leases are worse than a loan since you never get equity.
Is leasing a car a waste of money? Yes. By leasing a car, you’ll get a much more luxurious car for the same price as buying a car that’s isn’t as nice. By the end of your lease, you’ll have to return the car and have no equity after leasing the car for several years. If you had taken a loan for a car that isn’t as luxurious, you would still have a car that holds some of your money in it’s resale value. Conditions are different from everyone, but as a cheap person trying to help you save money and build your credit score, it’s a waste of money.
What credit score do I need to lease a car? You’ll need a minimum credit score of 620 for a lease. That’s for the worst rates they can legally give you. Improve your credit so you don’t waste money by helping the bank get richer.
Do you need a loan for a lease? You don’t need a loan for a car lease. You’ll still need to make a small down payment for the car if you are leasing, but that payment is much smaller than what you’d pay for if you had gotten a loan.
Does leasing a car hurt your credit? Leasing a car actually helps improve your credit score. A portion of your credit score is determined by the different types of credit you are using. Since you are trusted with a car lease, you’ll now have a new type of credit appear on your credit report. Other types of credit lines are credit cards, home loans, car loans, and student loans.
What is a lease?
A lease is a contract where one person rent property for a determined amount of time for a price. The most common types of leases are for cars and apartments. With a car lease, you make monthly payments for several years before having to return the car. That’s the same thing with an apartment lease. You’ll rent an apartment for at least a year (depending on the contract) and can continue making monthly payments until you move out. By moving out, you are returning the apartment to the landlord and won’t be required to make any more payments because your lease has ended.
Before signing any lease or contract, you should understand the terms that come with it. It’s very confusing and that’s intentional. Banks want to lay out all the details and will make it sound much more complicated than it is. This is so you make the wrong choice when making a lease and the bank makes more money. The most common lease types are:
- Absolute net lease
- Triple net lease
- Modified gross lease
- Full service lease agreement
Is a lease a loan? A lease is like a loan, but not exactly. Typically with a loan you’ll be exchanging money for some type of property. With a lease, you’ll be returning that property. Think of a lease as a rental. You’ll be renting something and making monthly payment to continue having it. Kind of like a Netflix subscription but it’s a car or apartment.
What is financing?
Financing is when a lender (business or person) provides funding to a consumer. Think of financing as someone that helps you pay for something you can’t afford. Of course financing isn’t free. They’ll charge you interest rates depending upon your credit score
What are different types of financing?
Debt financing is when a business or person sells all their assets to pay off their debt. It’s like a loan shark coming for the borrower. They well need to sell off everything they can so the creditors settle down. Here’s an example from Family Guy when tries to collect his money from Brian. https://www.youtube.com/watch?v=SD1n-DKUIeE Hopefully you won’t have to deal with debt financing.
Equity financing is when you sell you sell your equity to raise funds. It’s like a company selling their stock so they can have more money to reinvest and grow.
Loan Financing is the most common type of financing. You’ll typically see signs that say “financing available” or “easy financing” when buying a car. That just mean the dealership will provide customers a loan to finance their purchase. A loan is the borrowed money and finance is the process to help the customer buy the car. Loans and financing are practically the same thing in this sense. You’re borrowing money to buy something you can’t afford. The financing part is where you make payments for the loan.
Refinancing a loan is when you go to the bank and apply for a lower interest rate which also gives you lower monthly payments. This is very common for auto and home loans. To get the best rates, you’ll need an excellent credit score.
I refinanced my home loan from Wells Fargo (5%) to a local credit union which gave me a rate of 3%. That’s A LOT of money I saved in monthly payments and I was able to pay more of the loan principle much faster. Always shop around for loans and see if it’s worth the effort by running the numbers. If you just need more money from the equity in your home, I recommend looking into a HELOC. That’s a Home Equity Line of Credit, basically your borrowing money from the bank (with an interest rate) against the value of your home.
No-interest financing is when you get a line of credit to make purchases. You’ll have a 0% APR for a certain amount of time so you won’t have to pay any interest. This is especially common with credit cards. See: What does 0% APR mean?
Lease to own Vs Finance:
The difference between lease to own and owner finance is the option of making the purchase (after renting it for some time) versus making the purchase immediately. When you lease a car, you’ll be given the option to purchase the vehicle at the end of your lease. Some home sellers give you the option of rent-to-own, which is similar to a car lease. Finance vs lease to own is the same thing as loan vs lease.
Key Differences between loans, leases, credits, grants and financing
- Difference between lease and loan: A lease is like a rental and a loan is borrowing money
- Difference between loan and credit: A loan is borrowing money and a line of credit is the value of the loan.
- Difference between loan and grant: A loan is borrowed money that you have to pay back while a grant is money you don’t have to pay back.
- Difference between lease and finance: A lease is the rental agreement for a purchase and financing are the payment terms for the lease.
- Difference between lease and finance a car: A lease is the rental terms while the financing is the payments for the car.
TLDR
Leasing something is like renting an apartment or car. It doesn’t belong to you, but you are entrusted with that asset for the terms of your lease. The payments are smaller than straight up making a purchase. A loan is when you borrow the money to purchase a car or home. Financing is when you are making payments to your loan at the agreed-upon interest rates.
When it comes to lease vs loans, it depends on your situation. Does it make sense to buy something reasonable now and have that equity? Or does it make sense to buy something a little cheaper and use that money to invest with a higher return. To me, it makes more sense to lease an apartment or home since the cost is very high (depending on the city).
Since the future is uncertain, it might make more sense to pay rent. BUT, if rent in a city is the same price as a mortgage, it makes more sense to buy. When it comes to cars, I’m okay with buying something affordable and dependable rather than a short term lease. My true preference is a good public transportation system.