It's a common dilemma:
I am ready to purchase a New vehicle, so should I lease or finance it?
Everyone who has ever considered buying a New car has had this question cross their mind.
So is it better to lease or finance?
So we find out that making a lease-or-finance decision is not quite cut and dry. There are some things you need to consider. Let's take a look at some of these things now.
Financing and leasing are different
When you finance a car, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale value.
When you lease, you pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. Leasing is not the same as renting. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit that you don't pay when you buy. You make your first payment at the time you sign your contract - for the month ahead. At lease-end, you may either return the vehicle, or purchase it for its depreciated resale value, also known as the residual.
Finance vs lease example
As an example, if you lease a $25,000 car that will have, say, an estimated resale value (residual) of $12,500 after 36 months (50%), you only pay for the $12,500 difference (this is called depreciation), plus finance charges, plus possible fees.
When you finance, you pay the entire $25,000, plus finance charges, plus possible fees. This is fundamentally why leasing offers significantly lower monthly payments than buying.
Lease vs Loan
Typical lease compared to a 6% loan and a 0% loan. Leasing always has lower payments. Does this mean leasing is always better? Not necessarily. Payment is not the only factor that should influence your decision.
How are lease and loan payments different?
Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments, and repay the remainder when you either buy or return the vehicle at lease-end.
Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the full vehicle purchase price, while the finance charge is loan interest.
All vehicles depreciate in value by the same amount regardless of whether they are leased or purchased. Part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing - it's money you never get back, even if you sell the vehicle in the future. It's lost money for which you'll have nothing to show.
The remainder of each loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It's what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have. At some point in time, after the wheels have fallen off and the engine is worn out, the only equity left is scrap value. You never get back the full amount you've paid for your vehicle.
Just a comment on lease-to-buy plans
Some folks lease with the intention of buying their vehicle at the end of the lease, or before the end of the lease. This is nearly always more expensive than simply buying outright. However, you may have a good reason for this tactic. Just be aware that it costs you more in the long term.
One other thing - GAP Protection
Most car leases have automatic built-in gap protection, while car purchase loans almost always do not. Gap Protection pays the difference between what you owe on your loan or lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed in an accident. Why is gap protection important? Because it's very common, in these days of long-term loans and leases, rolled-over and refinanced loans, and little or no down payment, to be "upside down" - to owe more on your loan or lease than your car is actually worth. This can mean you'll still owe hundreds or thousands of dollars to the finance company even after your insurance has paid for your car that has been totaled or stolen. This turns out to be a huge shocking surprise for most people caught in this unfortunate situation.
So, nearly all leases have built-in gap protection, but loans do not. You're better protected with a lease, unless you purchase the gap protection separately at extra cost for the loan.
Let's simplify the answers and summarize them here:
LEASE - If you drive less than 20,000 miles per year, financially qualify for a lease, if you want to put little or zero money down, want lower monthly payments, want a shorter commitment term (36 months vs 60, 72 or more months), want less negative impact on your credit, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, can properly maintain your cars and understand how leasing works, then you should lease.
FINANCE - If you don't mind higher monthly payments, like the idea of having ownership of your car, prefer paying off your loan and being payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, like to customize your cars with aftermarket accessories or don't qualify financially for a good lease- then you should finance.
If you have additional questions regarding leasing vs. financing, or would like information about what would best suit your needs, please feel free to give us a call at (706)549-7002 and ask for John Dispoto or Cliff Washington.