lease versus buy, which is better? This is the question that everyone has going through their mind when looking for a new car.
Lease versus buy?
Leases and buying are two different methods of automobile financing. Leasing finances the use of a vehicle; buying finances the purchase of a vehicle. Each has both its own benefits and drawbacks.
It is not possible to just say that one is always better than the other, because the answer depends on the situation.
When deciding whether or to lease or buy, you must focus your decision not only at the financial comparisons, but also at your own personal priorities.
Therefore, making the lease or buy decision is not as easy as picking the car. There are things you need to consider.
First, is to understand that buying and leasing are two different things, not just two versions of the same thing.
Buying and leasing are different
When you buy, you pay for the entire cost of a vehicle; does not matter how many miles you drive it. You usually make a down payment, pay sales taxes in cash or add them to your loan, and you also pay an interest rate determined by your loan company, which is mainly based on your credit history. Then, you make your first payment a month after you sign your contract.
When you lease, you pay for only a fraction of the vehicle’s cost, which is the part that you use during the time you are driving it. You have the choice of not paying a down payment, you also pay sales tax only on your monthly payments, and you pay a money factor, which is a financial rate similar to the interest rate on a loan.
With leasing, you also may be required to pay any special lease related fees. You may also have a security deposit, which you do not pay when you buy. You make the first payment at the time you sign your contract.
Buy vs. lease example
As an example, if you lease a $40,000 car that will have, an estimated resale value of $25,000 after 36 months, you pay for the $25,000 difference. This is called depreciation, plus any finance charges, and fees. When you buy, you pay the entire $40,000, plus any finance charges, and fees.
This is why leasing is a much lower cost in monthly payments.
Lease payments are made up of two parts, called the depreciation charge and the finance charge. The depreciation charge is a monthly payment that pays the leasing company for the value of the car that is lost while you are using it. The finance charge is interest on the money the lease company has let you borrow while you are using the car. You are borrowing the money (loan) that the leasing company had to use to buy the car from the dealer. You repay part of that borrowed money in monthly payments, and repay whatever is left when you either buy or return the vehicle at lease-end.
Loan payments have a principal charge and a finance charge, which are similar to lease payments. The principal charge pays off the full car price. The finance charge is loan’s interest.
The rest of each loan principal payment goes toward equity; equity is resale value. It is what you will get back if you decide to sell your car. It is what is left of your car’s original value at the end of the loan after depreciation. The longer that you own, and drive your car, the less equity you will have. You will never get back the full amount you paid for your car.
Buy versus lease - savings account or no savings account
Leasing does not build equity “savings account”, while buying does. The only reason that a buyer has any equity at the end of their loan is by making higher monthly payments and purchasing that equity. Leasing means, you pay lower payments, but get no equity. Buying you pay higher payments, and get some equity. You will never get as much as you put in by buying or leasing a car.
Leasing can be a little more complicated
Because leasing is a little more complicated; you should be complete aware and have knowledge of what you are doing while leasing.
Some people lease a car with the intentions of buying at the end of the lease, or before the end of their lease. This is almost always is going to cost you more than just buying the car.
Most car leases have automatic built-in gap coverage, while car purchase loans usually do not. Gap coverage, pays the difference between what you owe on your loan or lease, and what your car is actually worth if your car is stolen or totaled.
Therefore, nearly all leases have it, but most purchase loans do not. You are better protected with a lease, unless you purchase the gap insurance separately at extra cost for the loan.
Which is better, lease or buy?
It all depends on what is good for you, and your lifestyle.
If you like driving a new car every two or three years, and want lower monthly payments, you should lease. If you also like having, a car that has the latest safety features and is always under factory warranty, and do not care about ownership equity; you should lease.
If you do not mind higher monthly payments, and prefer to build up some trade-in or resale value. If you also like the idea of having ownership, and like paying off your loan to be payment-free for a while. If you do not mind the unexpected cost of repairs after the factory warranty has expired, like to customize your cars, and do not like the risk of surprise lease-end charges; then you should buy.