Leasing and buying are two methods of new car financing. Leasing is a way to finance the use of a car over a period of time. Buying with a finance contract is a way to purchase a vehicle over a period of time. Each method has drawbacks and advantages. The choice depends on a combination of personal preferences and financial priorities.
Buying Summarized
Typically, when you finance the purchase of a new car, you arrange to pay for the vehicle regardless of how many miles you intend to drive it. You usually make a down payment. Sales taxes and registration fees are charged, and you are likely to have them rolled into the loan. You will pay interest. The rate of interest may be determined by the lender and the lender's determination of your credit worthiness. If you decide to sell before the loan contract is completed and paid off, you can do so by arranging to pay off the loan and transferring the title to the new owner.
Leasing Summarized
When you lease, you may not be required to make a down payment. You make a lease agreement to pay a monthly amount for the use of the car during a specified period of time. Depending on your state of residence, you may pay only sales tax on the monthly payment. You pay a rate known as a money factor, which is similar to loan interest. The lease agreement may also contain additional fees. When the lease period expires, you usually have options. You may be able to return the vehicle and, provided you have not exceeded the mileage portion of your agreement, you walk away. If you have exceeded the mileage, you will be charged for the additional miles as stated in your lease agreement. Another option would be to keep the vehicle, purchasing it at the lease end. If you terminate the lease before the end of the contract, you have the responsibility for early termination charges written into the agreement.
Reasons for Leasing
For some drivers, driving a car that is never more than two or three years old is important. The car may remain under manufacturer's warranty and have a low risk of breakdown and need for repair. With leasing, monthly lease payments are commonly lower than monthly loan payments. When you lease, you are paying for the car's depreciation and the use of it. You own no interest in it.
Reasons for Buying
For other drivers, ownership is important. While the initial cost to enter the loan may be high and monthly loan payments including interest may be higher than a lease payment, after the loan is paid in full, the vehicle belongs to the owner. Its value will have depreciated just as the leased car's value has depreciated, but no further payment will be required from the owner who has paid off the car.
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