You can take out a loan (probably quite substantial in size) and put it towards the cost of buying a car – or, you can lease a car. This essentially means renting a vehicle from a finance company for a monthly fee over a fixed period of time. When the leasing period is up you can either hand it back or exchange it for a new one. So, which option suits you best?

Benefits of leasing

1. Lower monthly payments Your monthly payments when you lease could be a whopping 60% less than your monthly purchase payments. This is because when you lease a car you are paying the difference between the purchase price and the residual value (the predicted value of the car at the end of the lease). It's definitely the cheaper option in the short term.

2. Regular upgrades You can change your car on a regular basis rather than driving the same car for a decade or two. Contract lengths usually start at just 2 years long. This should appeal to you if you get bored with the same car easily or have neighbours you want to impress.

3. Avoid extra costs As you would be upgrading regularly (see above), you can avoid the costs associated with driving an older car. If an issue were to arise it should be covered under warranty – you won't have to fork out for car tax either as that is included.

4. Reclaim VAT on the lease contract If you are leasing a car for business use then you may be able to reclaim 50% of the VAT on your contract. Best to ask your accountant for more details though!

Benefits of a loan

1. Own it As you repay your loan each month you are gaining equity. Put simply, by the end of the repayment period you will own the car.

2. More freedom When you lease a car there are limits on your mileage – although you can buy extra miles if you need them. When you are paying for the car, you won't have to think about how far you drive.

3. Credit check If you are leasing a car, you will need to demonstrate a good credit rating (you can always enlist the help of a co-signer if needed). This is less of a worry when you buy. Individual circumstances will always play a role in the decision you make. Taking out a loan is all too easy these days, but you have to commit to the high monthly repayments over a number of years. Leasing, on the other hand, offers cheaper monthly repayments, a shorter-term commitment and more flexibility. Give it some thought, work out how much you can afford and stick to your budget.

Your questions answered in our car leasing FAQ