There are a lot of decisions to make when getting a new vehicle, among them is, “Should I buy or lease a car?” Each financial choice offers advantages and disadvantages. For example, monthly car payments when purchasing a vehicle are generally higher. While a lease offers lower monthly payments that allow people to get an upgraded vehicle, the payments continue until the lease ends and the vehicle is returned. Or there is a buyout loan that may come with higher interest rates than buying a new car. Though it is complex to compare these two different forms of acquiring a new vehicle, let’s break it down.
Purchasing a car basically involves getting a conventional car loan. While one can pay in cash, due to the high expense of vehicles, a buyer will generally acquire a loan through a bank, credit union, or other lending institution. A buyer may make a down payment and/or trade-in another vehicle to offset some of the costs of the new vehicle. Then, the buyer makes monthly payments on the balance due on that vehicle, which includes paying the principal and interest on the loan, plus other finance charges, taxes, and fees. Interest rates vary depending upon numerous factors including the borrower’s credit score. Basically, the better the credit score, the lower the interest rate, and the lower the monthly payment. Every time the buyer makes a monthly payment, not only do they pay down the loan, but they gain equity. At the end of the loan, the car belongs to the buyer. Sometimes, warranties come with cars or can be purchased separately.
Leasing a car means that one is paying to use a new car, but he or she is not working toward ownership. It is basically renting it from a dealer for a fixed period. Money down is often required, and interest rates may vary depending upon one’s credit score – with the best deals available to those with stellar credit. Additionally, there is no trade-in value at the end. Leasing is popular because it can put people in more high-end vehicles than they can typically afford to buy. Plus, monthly payments may be more affordable than purchasing a vehicle. Depending on the type of lease, there may be a buyout option at the end of the fixed period. This means that the person leasing the vehicle can opt to buy the vehicle at the residual value upon completion of the leasing term. The residual value of a leased car is what the leasing company expects the car to be worth at the end of the lease. The buyer of a leased vehicle would also be responsible for taxes that may apply. Bear in mind that leases have mileage limits and drivers may be penalized for going over the cap. Also, leased automobiles must be kept in decent shape to avoid charges for excess wear and tear that can cost the buyer in the end, should they wish to return the vehicle after the lease is up. Additionally, if a lease is terminated early, charges may apply. Per Consumer Reports, “In the end, leasing usually costs you more than the equivalent loan because you are paying for the car during the time when it most rapidly depreciates.”
When deciding whether to buy or lease, most people look at what car they want and then the monthly payment. But it is equally important to also consider the long-term. When you buy a vehicle, you own something in the end. This can help you get out of car payments and into a new vehicle in the future. With a lease, after making the payments, you don’t own anything. It’s also important to look at other factors such as annual insurance costs. Insurance for a leased vehicle is generally higher than that of a purchased car. In some cases, leases can provide rebates, offer business owners some tax advantages, and perks such as free oil changes. However, when a person continues to lease vehicles, they never get out of having a car payment. Ultimately, most experts agree that while it’s hard to compare these two different forms of financing, buying is likely the best option for people who intend to keep cars long-term, even when factoring in typical maintenance and repairs.
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