Purchasing is different from leasing.
If you decide to purchase a vehicle you own it in full. This usually entails making a down payment, paying sales taxes and paying an interest rate dependent upon your credit score. You pay for the vehicle monthly, but are not restricted to the number of miles you drive each year. Once the loan is paid off you can continue to drive the car for free and you will only have to pay for pay for maintenance and repairs.
If you decide to lease a vehicle you only pay for a portion of the vehicle’s total cost. You have the option to make a down payment, which reduces the vehicle’s capitalized cost and lowers your monthly payment further. Sales tax still applies, but it is figured on your monthly payment, rather than on the total value of the vehicle. Your lease may also include inception fees and, possibly a security deposit. You must also be prepared to make the first payment when signing your lease agreement.
What makes up the lease payment?
The lease payment is made up of two components: the depreciation charge, and a finance charge.
The depreciation is based on how much value the vehicle loses as you drive it. This compensates the leasing company for the loss in vehicle’s value, for effectively lending it to you.
The finance portion is the interest accrued on the money the finance company has tied up in the car while you’re driving it. In effect, you are borrowing money that the leasing company used to buy the car from the dealership. You pay the remainder when you either buy or return the vehicle at the end of the lease.
What makes up the loan payment?
The loan payment is made up of two components: a principal charge and a finance charge.
The principal goes toward equity. It is otherwise known as the value that remains in your car at the end of the loan after depreciation. Equity is resale value. It’s what you get back if you sold the car.
The finance pays for the interest on the loan.
Leasing is more complicated than owning.
Leasing involves more complicated variables such as residuals, and money factors and should not be entered as casually as you would a simple loan. There are more opportunities to misunderstand and to make mistakes. Leasing requires you to be more careful and more informed than when purchasing.
What is lease-to-own?
Many people enter leases with the intention of buying the car after it ends, or even before the end of the lease. This is usually a more expensive means of ownership than simply buying outright from the very beginning. Though you may have a good reason for leasing-to-own, such as taxes – be careful.
What is better, leasing or purchasing?
This is a very personal decision. It depends on what is important to you.
This is the main reason why less expensive used cars make sound investments for the long run, than a newer car with a higher price.
If you prefer to drive a new car every two or three years, want lower monthly payments, don’t care for ownership, and are not inhibited by limitation on number of miles driven – leasing may be a viable option.
If you are able to afford a higher monthly payment, prefer to build up equity, like the idea of ownership, and don’t mind the cost of ownership once the loan is paid off and the warranty has expired – then purchasing the vehicle may be a viable option.
Cost based analysis.
The short-term benefit of leasing is that it costs 30%-60% less when compared to the cost of purchasing.
The medium-term cost of leasing is about the same as the cost of purchasing. (Assuming the buyer will sell or trade their car at the end of the loan.)
The long-term cost of leasing is much greater than the cost of purchasing. If you keep the car after the loan is paid off you can continue to drive it without additional monthly payments. This can save thousands of dollars per year.
Short-term leasing will always be more expensive when compared to the long-term costs of purchasing.