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When the time comes for you to acquire a new car or truck, you have a lot of options on the table when it comes to driving away in your chosen vehicle. If you do not plan to buy it outright in cash, you can either lease or finance. In either case, you’ll end up paying more for the auto than if you had paid in cash, but for many of us, that’s simply not an option. So what do you do? Do you go with the financing option or the leasing option? Which is cheaper? Let’s answer those questions so that the next time you find the car or truck of your dreams, you’ll be getting the best deal possible.
What Is A Lease?
In layman’s terms, an automotive lease is a means of procuring the auto you want without taking out a large loan. Usually, initiating a lease entails making a down payment, which is, in most cases, less than 20 per cent of the auto’s total value. In other words, if want to lease an auto, plan on either making a trade in or having the necessary cash on hand to take care of the down payment. Some promotions waive the down payment, but your monthly payments will end up being higher than they would be without a down payment.
Monthly Payments
The monthly payments of a lease are comprised of two components: a depreciation charge and a finance charge. A finance charge is the interest on the amount borrowed, while a depreciating charge is money that goes to the leasing company to compensate them for the auto’s lost value during the time that you own it. In comparison, an auto loan also consists of a finance charge, but instead of a depreciation charge, you’re paying for the principle amount borrowed.
Lease Terms
Leases usually have terms. The term of the lease will vary depending on the manufacturer or dealership, but on average you can lease a car or truck for three to four years. After the three or four years have expired, you bring the auto back to the dealership. In a sense, you are renting the auto for three or four years. Some like to buy their leased autos after the lease has expired or even before it expires, but keep in mind that this option is typically more expensive than buying the auto from the beginning. However, if you have a reason for this (i.e. you’ll end up saving money on a particular deal), then by all means, go for it.
Arguments For And Against Leasing
The one major issue with leasing is that a lease usually comes with various terms and restrictions. It is vital to the leasing company that you take care of it, as they want to get the best possible price when they sell the auto to a dealership. That means bringing the car or truck in for its scheduled maintenance and such. Plus, there are usually mileage restrictions, meaning that while the auto is under lease, you may be able to only drive “x” amount of miles in total. It is my recommendation that you lease an auto if you have a somewhat predictable lifestyle and if you have a stable income.
The advantage of leasing an auto every three or four years (sometimes two years) is that you get a new car or truck in a predictable manner. There is nothing better than the feel of a new auto and this way you get that feel far more often than if you buy or finance an auto. Plus, you are getting the latest in safety and technological features, which in turn could save you money on auto insurance and give you what a lot of people crave in an auto (one heck of a stereo system amongst other things). Most importantly, you are not responsible for any mechanical defects in the auto, as it is always under warranty. For example, if the transmission goes out unexpectedly, you’re not financially responsible for it.
Arguments For And Against Financing
A lot of us like owning the things in life that are major investments and that is what financing will get you. You may not technically own the auto until you have officially paid off the loan, but after that, you are the one and true owner of your auto. In turn, that means you can do whatever you want to it. Plus, after paying off the loan, you’ll be free of payments for as long as you would like, which can be put towards other things that you want, while constantly leasing an auto comes with constant monthly payments. Finally, you can drive as much as you would like and spread out costs over a period of years.
There are downsides to financing and owning a car or truck though. In most cases, you’ll have higher monthly payments than if you lease an auto, which can force you to cut back in other areas of your life. Probably the ultimate downside to financing or owning an auto is the fact that you are responsible for maintenance and repair costs, especially after the warranty has expired. Of course, you can remedy that with an extended warranty, but those cost money as well.
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