Leasing a car is often an easy and affordable way to have a car without having the money to buy it outright, however, lease payments may have an effect on your ability to get a mortgage loan. To find out more about how monthly payments for your leased car could affect mortgage eligibility, take a look below.
Does Leasing a Car Affect Mortgage? Will Leasing a Car Effect Buying a House?
Leasing a car has an impact on your debt ratios. When you lease a car, you essentially just pay for the use of a car and at the end of the contract, you have no equity in the car. The car payments you make on a leased car do not improve your net worth, which means lenders look upon them less kindly than they would for, say, an auto loan.
When you take out a car loan, the more monthly payments you make, the more equity you eventually own in the car, and therefore the more net worth you have.
Often, both car leases and car loans are included in your DTI ratio if you are looking for a mortgage loan. A car lease will have more of an impact on your eligibility and monthly payment amount for a mortgage, however, any kind of loan payments that take away financial resources will be taken into consideration when you’re applying for a mortgage.
Leasing a Car Vs. Using a Car Loan to Buy a Car
Leasing a car is like renting a car, using it, and then returning it to the dealership at the end of the contract. You can then take out a new lease or buy the car. There are pros and cons to leasing which we’ve taken a look at below.
Pros of Leasing a Car
- New car: With car leases, you can get your hands on a relatively new car every few years. You’ll always have the latest features and the newest models.
- Low monthly payments: If you have a smaller gross monthly income, you may choose to lease because you’re more likely to have lower monthly payments than with a car loan.
- Free maintenance: In most cases, a dealership will offer free maintenance on leased cars which means you don’t need to fork out every time you have an issue as you would were you buying a car.
Cons of Leasing a Car
- Ownership: You never actually own the vehicle, unless you choose to buy the car at the end of the contract. This means that although you’ve been making monthly car payments, you never actually buy any equity in the car.
- Depreciation: Used cars aren’t leased and so you will have to lease a brand-new car. New cars lose about 30% of their value within the first years, which means you’re generally paying for the depreciation with your monthly lease payment.
- Termination fees: If you want to alter your car lease terms or change the car, you will likely have to pay a pretty hefty fee for leaving your contract early.
- No customization: When you lease a car, you cannot make any modifications or you will be charged a customization fee.
- Kilometre limitations: Often, during a car lease you cannot drive more than a certain number of kilometres in one year for every year of the lease. You may be charged if you exceed this limit.
- Mortgages: Car lease debt payments are likely to count against you in your debt-to-income ratio when you apply for a mortgage. On the other hand, an auto loan may be more favourable to lenders.
While you may be leaning towards leasing a car because lease payments are more affordable, there are some considerations to make beforehand. With a car loan, you will need a down payment, but it could be more cost-effective in the long run. We’ve looked at the pros and cons of car loans below.
Pros of a Car Loan
- Credit report: Making monthly loan payments on a car loan can actually help your credit score. This is great if you’re looking to rebuild your credit history.
- Equity: Every car payment you make towards a car loan increases the equity you have in a car. It makes you one step closer to ownership.
- Debt to income ratio: In applications for a mortgage, a car loan is more favourable. As you’re actually buying a car with it, the monthly debt payments will eventually increase your net worth.
Cons of a Car Loan
- More expensive: Unfortunately, the monthly car payment for a car loan will be more expensive than those you would make with a lease agreement. Car loans include an interest rate and other costs that are not common in a lease term. If you’re also making mortgage payments, you will need to consider if you can afford another monthly outgoing.
- More requirements: Generally, there are no minimum requirements for a car lease but for a loan you’ll need to have proof of gross income, a good credit score, and more.
Note: Some lenders will still approve you for a loan even with bad credit. At Race Auto Group, we believe everyone, even those with blemishes on their credit report, deserves to get a car loan so we can help you get approved.
Looking for a Car Loan and Finance Company? Contact Race Auto Group Today!
If you’re thinking of applying for a car loan then Race Auto Group can help you out. We’re a car financing and loan company and we can get you approved even when others can’t. Get in touch