When it comes time to get a new vehicle, many debate whether it is more beneficial to buy a vehicle using an auto loan or to lease the car. Choosing the better of the two options depends on your personal situation, so there is not a one-size-fits-all option that is right for everyone. To weigh which option is right for you, you have to learn about the differences between the two options and the advantages and disadvantages of each option.
Auto Loan
When you decide to buy a vehicle using an auto loan, you generally make a down payment, pay tax and title costs and drive off the lot with your new car. When you buy a vehicle, you do not have restrictions on how many miles you can drive it per year and you can decide to trade the vehicle in for another vehicle at any time.
Car Leases
Leasing a vehicle tends to have a few more limitations and restrictions. Typically, leased vehicles limit the amount of miles you can drive the car each year and if you exceed this mileage then a per mile fee is charged to you at the end of the lease. For leases, you may not have to put a down payment on the vehicle depending on the dealer where you're leasing the car. In some states, you may not have to pay sales tax on a leased vehicle either. Instead, a portion of your monthly payments include the sales tax. Instead of your monthly payments going toward reducing the balance you owe on the car, it instead is the charge for your use of the vehicle. When the lease on the vehicle ends, which can be anywhere from two to five years after you lease the vehicle, you have the option to either buy the vehicle for its depreciated resale value or turn the car in to the dealer. At the time you turn the car in, you can either walk away and make other vehicle options or turn it in for another vehicle--leased or financed with an auto loan.
Lease Payments
The composition of car lease payments are slightly different from auto loan payments. The lease payments are composed of a depreciation charge and a finance charge. The depreciation charge is a fee paid to the leasing company for the amount of depreciation the vehicle takes on for your use of the car. The finance fee pays the leasing company for the interest on the money it has tied up in the car. So you're repaying the leasing company for these fees while you're driving the car. The balance is paid when you buy the car or turn it back in at the end of the lease.
Loan Payments
When you take out an auto loan to buy a vehicle, the monthly payments are also composed of two parts. The first part of the monthly payment is the principal, which is the part of the payment that reduces your total loan balance. The second part of the payment is the finance charge, which the is the interest you pay for borrowing the money to buy the car.
Lease or Buy
Whether leasing or buying is right for you depends on your end goal. If you want to own the car at the end of the loan, then buying may be right for you. If you drive a lot of miles each year, buying may also be right for you. If you prefer to turn your car in every couple of years for a new one and don't drive too many miles per year, then leasing may be the right option for you. It is typically more expensive to lease a car and then decide to buy it at the end of the lease because lease payments tend to be less expensive than auto loan payments so if your ultimate goal is to own the car, then an auto loan is a less expensive way in the long run to achieve your goal.
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