Buying a new car is exciting. Even if your budget is limited, there are lots of models and options to choose from. You can spend days and even weeks having fun while deciding what you want to buy. Once you have made this decision, most people then start to look at the auto finance options. This is not fun and folks tend to rush through the process, focusing on the monthly installments and the duration of the loan. They usually choose what they consider the cheapest. But auto finance is a complex issue with a lot of variables to consider. Let’s look at the pros and cons of the first choice you have to make – buying or leasing a car.
OWNERSHIP: When you take a loan and buy a car, it becomes your property, subject to the installments being paid on schedule. You can use the car how and as much as you want. The installments you pay cover the full cost of the car as well and the interest being charged on the loan. When the loan is finally paid off, your relationship with the leader ends and you can do what you like with your car. Leasing does not confer these rights on you. When you lease a car, you do not get ownership of the car. What you get is the right to use the car for the period of the lease. You are only paying for the use of the car (which includes a projected monthly mileage) and the depreciation the car will attract during the period of the lease, plus some usage charges. At the end of the lease period you have the option of returning the car to the leasing company or paying the residual value and keeping the car. Leasing is often a popular form of auto finance with professionals who can get some tax write off on the lease payments.
INSTALLMENTS: When buying a car your monthly installment covers the complete cost of the car, interest charges. When leasing, your monthly payments (installments is not the right word here, although it is commonly used) are lower than when you buy the car because you are not purchasing a car, only paying for the right to use it plus rent and taxes. Also, your projected monthly usage affects the monthly payment. The more you use the car, the more you will have to pay. At the end of the lease period you are left without a car, unless you decide to buy it.
INITIAL COSTS: Buying a car entails making a down payment, taxes, registration and other fees that the auto finance company may charge. In the case of leasing, what you pay is the first month’s payment in advance, a security deposit which is refundable after adjustment for damages, excess uses etc., a capitalized cost reduction charge to cover the depreciation, and registration and taxes.
There are many other differences in using auto finance to buy or lease a car. The trick is not to let the seemingly lower cost of leasing influence your decision. Remember that when a car is leased you do not own it and have not acquired an asset.