You're ready to buy a new car--but is your credit ready? And will that fat new monthly payment put you out on the street? Yes sir, the pressure's on--you can feel it. Heck, you don't even know whether you should finance or lease the thing.
Don't worry. Most people aren't too clear on the differences between traditional financing and leasing. Those who take the time to understand at least the basics before they buy stand a better chance of driving away from the dealership happy with car and the contract.
What's the difference? When you lease, you are paying for the use of the car, and your payments cover the cost of the vehicle's depreciation over the time you drive it, rather than towards the car's purchase price. The 'lessee' has responsibilities to maintain that car, and when the lease is up you can opt to buy it, or return it. It seems simple, but there are many things to consider when deciding whether to buy or lease.
Leasing :
- Leasing is an affordable way to drive a new car (and an upscale model that may have been beyond your purchasing power) . Leasing payments (per month) are generally lower than financing payments. Some important points to consider:
- Leasing is a good idea if driving a new car is more important than owning one.
- Requires you to maintain your car regularly, basically keeping it the way it left the showroom. No customizing, or altering it, to suit your whims.
- It’s a good option if you tend to get bored with a car every couple of years.
- You may have legitimate business reasons for leasing, including possible tax benefits.
- Don't plan on driving more than 12,000-15,000 miles each year. Leasing contracts have annual mileage limits, and penalties can be significant. Mileage limitations are the bottom line when deciding to lease.
- Leases often can be initiated without any down payment, and a typical two- to three-year lease lasts about half the time of a typical auto loan.
- It can mean significant penalties if you end your lease earlier than you initially agreed. When you sign the contract, you have to keep it for the term specified. Penalties differ from lease to lease.
- Leased vehicles are almost always covered by a factory warranty for the duration of your contract--major maintenance is not your financial responsibility.
Buying:
- The best benefit to buying is that you have ownership and equity in the vehicle. Your monthly payments are working to purchase a car, and once the payments are done it’s all yours. Simply, buying gives you control over your vehicle. You can modify it, and add special features or alter it. Some additional points to consider:
- Monthly payments are generally higher. This is because a purchase is based on the total value of the car, not just depreciation.
- Usually involves a down payment-a trade-in or cash.
- Maintenance is up to you. Always maintain your factory warranty and service your cars, but you're not on a strict schedule, with penalties.
- Obviously entails no mileage limits.
- At the completion of the finance period, ideally no balloon payment should exist.
- Because a typical manufacturer's warranty is shorter than your financing term, your maintenance costs may run higher than with a typical short-term lease.
Key Concepts:
The two-to three-year lease:
Short term leases work for those who want a brand-new car every few years. The factory covers major maintenance costs for the duration. You pay for required servicing, usually. The big concern: if you terminate this lease early, you can pay severe penalties.
"Zero down" and low monthly payments
Leasing can let consumers drive a fancier, more expensive car than they may have been able to buy or finance. To calculate a lease payment , the lessor tallies the estimated amount the vehicle depreciates over a set lease period, adds the interest being paid by the lessor to finance the car while you drive it, and several other assorted fees. Many leases can be started with 'no money down,' although a down payment ensures lower monthly payments. The Federal Reserve Board recently enacted consumer-friendly legislation that requires all dealers to disclose the key variables of a lease: the interest rate, residual value, length of lease, size of down payment, etc..
Returning the car when the lease ends
When the lease expires, you can either buy it, or return it. If you return it you must: 1) return the vehicle in its original state-no accessories, modifications, or different parts; 2) make sure the vehicle in good shape, with no excessive 'wear and tear'; and 3) meet mileage limits.
Opting To buy at lease-end
If you opt to buy, the key factor is the residual value of the vehicle. Most leases are "closed-end" leases, and that means that residual value is clearly stated at the start of your lease. In most leases, you will pay this amount regardless if the market value is higher or lower at the lease's end. An "open end" lease makes the consumer responsible for the potential gap between the residual value and actual market value at the end of lease.
* All Leases 10500 miles per year unless notes other wise.
All payments figured with $1000 lease loyalty money and not with doc, vtr, dpp or state taxes.
