When you need a new vehicle, you need to decide whether to purchase a vehicle or lease one. Some people have never considered the difference. It’s the same thing as when you decide whether you will purchase or lease a home. One is a path to ownership when you pay it off, and the other is simply leasing the vehicle for an agreed-upon amount and timeframe.
Once the lease period is over, you can choose to lease a new vehicle, continue to lease the vehicle you have, or you can purchase the vehicle you are leasing at an agreed-upon amount. The lease period is generally 36 to 48 months.
Lease Payments
The difference between purchasing a vehicle and leasing one is most magnified in the payments. The lease payments are usually lower than payments if you are purchasing the vehicle through a loan. When you are purchasing a vehicle, there is the calculation of the agreed-upon sale price, interest rate, and loan length.
When you are leasing a vehicle, the calculation will also include the sale price and the lease’s length, but the calculation similarities end there. Generally, there are figuring the expected mileage that will not raise the lease payments unless you are expected to drive it more than the annual allotment, which in most cases, is about 10,000 miles. Instead of interest, there is a monthly rental fee. This fee is a fixed amount and not a percentage like interest. This fee is where the differences make lease payments generally lower than loan payments. Lastly, there are the taxes and fees determined by the sale price divided by the number of months in the lease agreement.
When you come to the end of the lease period, if you decide to purchase the vehicle, the dealer will figure the residual value minus the depreciation. This residual value would be what you would pay if you choose to purchase the vehicle at the end of your lease. Leasing a vehicle to purchase is often far less than obtaining a loan.
Some vehicle leasing companies will require a down payment or deposit. This should ultimately lower your payments. Depending on your intentions at the end of the lease, if a down payment is required, it would make sense if it factors into lowering your monthly payments. Still, if it would only benefit you if you purchase the vehicle at the end of the agreement, if you are not planning to purchase the vehicle, you may want to lease from a dealer that does not require a down payment.
Disadvantages of Leasing
- You will not have any equity in the vehicle to use it to obtain loans or if you wanted to sell the vehicle.
- You will not be able to use the vehicle to trade towards the purchase of another vehicle.
- Leases cannot be customized beyond what comes with the vehicle at the time of the lease.
- If you don’t have gap insurance or full-coverage, you may owe additional money if the vehicle is totaled during the lease.
Advantages of Leasing
- The monthly lease payments are generally significantly lower than loan payments.
- You can afford a more luxurious vehicle due to the lower payments.
- It is generally a lot lower in cost doing it through a lease if you purchase the vehicle.
- You can have a new vehicle every three or four years if you opt to lease another vehicle rather than purchase.
- Maintenance is covered since most warranties are three or four years that is the same length as the lease. This is great for vehicle repairs, and some warranties cover regular maintenance costs, such as oil changes.
- There is no haggling the price nor worries about reselling.
- If the vehicle is used for business purposes, the lease payments can be tax-deductible.
Conclusion
If you have the credit score to lease a vehicle, it can be more satisfying than purchasing a vehicle because of its advantages. The lower costs to drive a new vehicle and lease a new vehicle every three or four years make leasing a vehicle appealing. Even if vehicle ownership is your ultimate goal, the vehicle’s purchase at the end of the lease generally ends up being far less than obtaining a loan.
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