There are many things to consider when deciding whether to buy or lease your next new automobile. To help you decide, we are reprinting an excerpt from www.leaseguide.com, with their permission. This website will give you the answers and information necessary for you to make an educated and informed decision.
Leases and loans are simply two different methods of automobile financing. One finances the use of a vehicle and the other finances the purchase of a vehicle. Each has its own benefits and drawbacks. It’s not possible to simply say that one is always better than the other because it depends on your own particular situation and preferences.
You must not only look at the financial comparisons but also at your own personal priorities. Is having a new vehicle every two or three years with no major repair risks more important to you than long-term cost? Are long-term cost savings more important to you than lower monthly payments? Is ownership more important to you than low upfront costs and no down payment?
Buying and leasing are different.
When you buy, you pay for the entire cost of a vehicle regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company. You make your first payment after you sign your contract.
When you lease, you pay for only a portion of the vehicle’s cost, which is the part that you “use up” during the time you are driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and pay a money factor that is similar to the interest rate on a loan. With leases you may also pay extra fees and possibly a security deposit that you do not pay when you buy. You make your first payment at the time you sign your contract.
If you lease a car that costs $20,000 but is worth only $13,000 after 24 months, you pay for the $7000 difference (this is called depreciation), the finance charges, and additional fees. When you buy, you pay the entire $20,000 plus finance charges. This is fundamentally why leasing offers significantly lower monthly payments than buying.
Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you are driving it. The principal pays off the vehicle purchase price, while the finance charge is loan interest. However, since vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing. It is money you never get back, even if you sell the vehicle in the future.
The remainder of each loan principal payment goes toward equity. It is what remains of your car’s original value at the end of the loan after depreciation has taken its toll. Equity is resale value – what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have.
So, buying a car with a loan is essentially like putting money into a declining-value savings account. You never get out as much as you put in. A portion of every payment you make is lost to depreciation, a terrible investment by any measure.
Leasing is similar to buying but without the “savings account.” You only pay for what you use. It is true that you’ll own nothing at the end of a lease, but what you do not own is the same part of the car – the depreciated part – that a buyer also does not own at the end of his loan.
There are hidden cost differentials to consider. Automobile insurance options may differ when you lease rather than own a vehicle. When you purchase a new vehicle and sell it or trade it in you will receive a dollar amount that has been determined by means of a book value. When you return a lease vehicle, although the dollar value has been determined at the time you signed the lease agreement, you may be assessed other costs (i.e. excessive wear and tear, mileage beyond the agreed terms, etc.). You will be liable for these cost at the termination of the contract. Therefore, it is imperative you review all documents before you sign the agreement.
DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt. Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email firstname.lastname@example.org.