Posts Tagged ‘financing a car’

Leasing a Car vs. Financing

Saturday, May 1st, 2010

Most people aren’t even aware of the fact that there are certain advantages to leasing a car compared to financing it. Many people think that it’s really a bad idea to lease as they have heard it from their friends or from those that they know. If you don’t know the advantages of leasing, then we suggest that you take a look at the advantages that it can offer you.

If you think that you drive less than 15,000 miles in a year and even have a safe place to park the car, then leasing would work just fine for you. Leasing is the way to go if you are looking to use the car for a short period of time. The typical lease installment runs for 36 months. Now the lease amount is calculated on the price of the car minus the residual value of the car. The residual value of the car is the price that the car dealer is going to get when they sell it at the end of the lease period.

For this reason, the lease value on the car works out to be a cheaper option than financing the car. You can lease a new car and pay far less than you would pay if you were financing the car. Moreover, you can even return the leased car before the bumper-to-bumper warranty on the car expires and it gives you mechanical trouble. At the end of the lease term, you don’t even have to worry about selling the car since you can just walk away worry-free. However you need to give the car back in the same conditions that it was received in from the car dealership. Leasing works better for a shorter period of time rather than a longer period of time.

Leasing means that you don’t need to pay any upfront charges unlike the finance option. The lease amount is that portion of money that is paid for when using the car for a specified period of time. Remember that leasing is not the same as renting. You don’t necessarily have to make a down payment but you would need to make monthly payments for the period that you are using the car. Moreover, you also have the option of buying the car at the end of the lease term period at the depreciated value.

To give a simple example, if the car costs $30,000 and is estimated to have a resale value of $18,000 at the end of 3 years, then the lease amount would be paid on the difference i.e. $12,000. As a lessee you would be making lease payments for $12,000 calculated on a monthly basis. Note: there are other fees including the finance fee and sales tax included in your monthly payment, but the depreciation is most of what you pay for over the term of the lease.

If you were to finance the car, you would be making a down payment for the entire $30,000 and then make monthly payments for the rest of the money for the entire period of the loan. If you were to rent the car, you would simply pay a rental value on the car. This is how all the three concepts would work. For this reason the leasing option is cheaper than financing the entire car.

It works well for those who are looking at changing their cars every 2-3 years. However, the need can vary from person to person. Lease payments have two parts. The first part is the depreciation charge or the depreciation value during the term of the lease and the second part is the finance charge, where the lessee will pay interest on the lease amount.

If you miss any of the lease installments, it will show up on your credit report, so it’s very important to make all the payments on time as well. Leasing doesn’t allow you to build equity on your car.

When a person is financing, they will need to make a down payment and also pay interest on the principal amount also. You will build up equity in the car and this works well for your credit report also.

When you finance a car, it can become expensive to pay the instalments at the end of 5 years especially when the car has depreciated quite a bit. Yes, it can become difficult for a person to pay $700 instalments even after 5 years. It’s like putting money in a loss account. However, you save money when you lease a car as, the charges are much lower and you don’t need to pay interest for the full purchase value.