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Buy Vs. Lease Car

If you are in the dilemma of choosing between buy vs. lease car you will need to take into consideration their pros and cons. We cannot tell you that one is better than the other because the answer depends upon the situation of each individual, car chosen, available budget and so on. Lease and purchase loans are two different ways to finance a car (remember, leasing is not renting). One will finance the use of a vehicle while the other finances the purchase of a car.

When thinking about which one to pick, you must analyze not only the financial comparisons, but also what you want, what your priorities are. You’ll need to ask yourself the following questions: Is having some ownership in your car more important in comparison to low up-front costs and no down payment? Is having a new car every 2-3 years with no major repair risks more important in comparison to the long-term cost? Is it more important for you to pay off the car and be debt-free, even if it means that you will be paying very high payments for the first years? Are long-term cost savings more important to you than the lower monthly payments?

Needless to say, buying is different from leasing. When you buy a car, you pay for the entire cost of it and it doesn’t matter how many miles are on the odometer. In most cases you make a down payment, pay those annoying sales taxes in cash or you roll them into the loan, and pay an interest rate that is determined by the lender, based upon your credit rating. The first payment will be done after a month since you’ve signed the contract. Later on, you will have the possibility to sell / trade the car for its depreciated resale value.

When you lease a car, you will pay only a portion of its cost, which is the amount that you “use up” during the time you are driving the car. As we mentioned in the first paragraph, leasing is not renting. You can choose not to make a down payment and you will be paying the sales tax only on your monthly payments. In addition, you will have to pay a financial rate, named “money factor”, that is very similar to a loan’s interest. In some cases, you will be asked to pay fees and also make a security deposit that you do not have to pay if you decide to buy the car. The first payment must be done when you sign the contract – for the month ahead. When the lease is over, you can either return the car or buy it for its depreciated resale value.

Here is an example of buy vs. lease car – you decide to lease a car that is worth $20,000 and will have an estimated resale value of about $13,000 after two years, you will only have to pay for the $7,000 difference (the depreciation), plus finance charges and maybe some fees. When you buy the car, you will pay $20,000 + finance charges + possible fees. This is the reason why leasing offers lower payments in comparison to buying.

The lease payments are made out of two parts: a depreciation charge and a finance charge. The first one compensates the leasing institution for the portion of the car’s value that is lost during the contract lease. The second part is interest on the money the company has tied up in the vehicle while you are driving it.

The loan payments also have two different parts: a principal charge and a finance charge. The first one pays off the full car purchase price while the other one is loan interest.

If you select to lease, you may have the possibility to put your monthly payment savings into more productive investments, like stocks or mutual funds that have the same possibility of increasing in value. You need to know that leasing can be a little more difficult because it can get complicated due to the residuals, money factors and so on. You should not consider it as a simple loan.

Now, what to choose? Lease or buy?

Lease if you prefer driving a brand new vehicle every 2-3 years; making lower payments, enjoy having a car that has the latest features and it is always covered by the warranty; don’t enjoy trading / selling used cars; don’t think about building ownership equity; drive an average number of miles; have a stable predictable lifestyle and take good care of the car.

Buy if you can accept the higher monthly payments; want to build up equity; enjoy the idea of owning a car; wanting to pay off the car and be payment-free for a period of time; accepting any unexpected repairs that will cost you money (after the warranty has expired); driving as many miles as you want; enjoy customizing the car and if you want to avoid possible lease-end charges.

Without any doubt, the best way to get behind the wheel of a late model and pay as low as possible is by taking over someone else’s exiting car lease. It is way more affordable in comparison to buying or leasing. Most of these leases have been signed a couple of months ago when the automakers were giving out almost incredible money-losing deals and very low monthly payments. Many customers took these deals and now want to get rid of the car due to various financial problems. Many of the financial institutions allow lease transfers with the condition that one of the parties pays the transfer fee.

In the end we invite you to visit our Automotive Articles section where you will find out more about buying/selling cars, assuming a lease and other similar topics.

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