The cost of leasing or financing a vehicle is one of the largest monthly expenses for some. Unless you live in a town with easy access to public transport or have plenty of ride sharing services, you likely need your own vehicle to do things. However, it can be quite intimidating when it comes down to choosing to pay cash, get a lease or an auto loan.
How Purchasing a Car with a Loan Works
When you buy a vehicle you make monthly payments, including interest, over a fixed amount of time. In some cases, an auto dealer or lender may not require a down payment the more you pay upfront, the lower payments and your debt will be.
If you make a 20% or $ 6,000 down payment and purchase a new car for $ 30,000, you make up the difference by financing $ 24,000. Your payments are determined by the loan’s rate of interest and length. Other factors include whether you purchase a vehicle, the cost and how much you earn.
Even though a lower monthly payment sounds great, the longer your repayment term, the more interest you pay over the life span of the loan. While a payment that is lower always sounds good, the longer your repayment term, the interest you pay over the life of the loan. Another way to borrow less for a car is to trade-in your vehicle — if the dealer will offer a reasonable value to you. The trade-in value is deducted from the cost of a vehicle.
When purchasing a car, make a goal to pay at least 20% of the purchase price, including any promotional or trade rebate, to find the best deal. Before stepping on a dealership’s lot and do your homework. Know the cost of the car you want, the amount of cash you can put down the value of rebates or any trades, and the monthly payment you can afford.
As you never build equity in a rental deal unlike with a car loan, you should pay as little down as possible with a rental. Your lease payments compensate plus additional fees that provide them for making a deal with you a gain. There’s typically a down payment due at a lease signing, for example 10%. As you never build equity, unlike with a auto loan, you need to pay as little down as possible with a rental. In other words pay the necessary amount upfront. It’s ideal to lease new vehicles only.
Let’s say you rent once your lease expires, a car which will be worth $ 20,000 in three years. This $30,000 in depreciation, less any trade in or down payment, plus dealer fees, is the basis for the calculation of your monthly rental payments. That’s why lease payments can be much lower than loan payments for the vehicle. Instead of paying for the car, you pay for the depreciation of the car during the time it is leased by you.
There are a number of factors that go into the calculation of a monthly car lease payment including the term (such as three or five years), the retail price of the automobile, your down payment, credit score, depreciation, dealer fees, and state and local taxes.
At the end of the lease term you purchase it at a value, which is called the residual value or may return the car. The higher the residual value, the greater it is worth at the end of a lease and the lower your lease payments will be. Getting a car loan means having equity with payments. Vehicles are often poor investments because they depreciate, no matter what as I mentioned, if you purchase or rent them.
The best option depends upon your lifestyle goals, and how you intend to use a vehicle. Use the below 6 tips to consider your personal preferences and know whether a car loan or lease is best for you:
1. You don’t want to deal with car repairs
A significant advantage of leasing is that you don’t have to deal with major repairs if you receive a lease term that does not exceed the warranty. This protects you from having to pay for repairs you are still responsible for maintenance.
When you return a vehicle, the dealer checks for damage and might charge you for wear and tear. Consider purchasing a long lease warranty that would cover parts like tires or brakes if you tend to be an aggressive driver.
2. You want to drive a new car
Leasing can be attractive because you get to drive a high-end or newer vehicle every other year or so. You get a monthly payment that is lower than if you were to get an auto loan. If you purchase a car with a low or no-interest loan, leasing is generally more affordable in the short term.
That makes it affordable to drive a vehicle with the options and safety features every few years. Based upon occupation and your lifestyle, maintaining that new car smell might be exactly what you want.
3. You don’t want the hassle of selling or trading
There’s no doubt that leasing a car is just more convenient than purchasing. You won’t have to worry about what to do with your car when you are ready for a new one. Plus, if the vehicle is a lemon, you’re not stuck with it.
4. You want to drive lots of miles
While there are loads of upsides to leasing, it comes with downsides as well. A biggie is that you’re typically charged a mileage fee if you drive more than 10,000 to 12,000 miles per year. Depending upon lifestyle and your work, maintaining low mileage may not be possible. You can drive it as you want, when you borrow money to buy a car.
5. You want flexibility to modify vehicles
Another advantage of owning versus leasing a car is that you have flexibility to sell it or trade it in for a new one–even if you have an auto loan. But breaking a car lease is more restrictive and may be expensive. I’ll cover more about that in a minute.
You might be pleased to own a vehicle if you…
6. You want to pay as little for a car as you can
The upside is that after you pay the loan off, you could drive it without a car payment for a long time. If you can not afford the payments of a auto loan, consider buying a less expensive model or a used car. You’re taking a risk that your car won’t need any expensive repairs following any warranty that you might have expires, which could easily wipe out the savings you hope to achieve.
How to Get Out of a Car Lease Early
First thing first, read your contract and understand the cost of breaking a lease and then talk to the dealer.
Here are three options if you Want to get out early to consider:
Choice #1: Return the car
Because you are still on the hook for payments, returning a leased car prior to the end of a lease to the dealer is never wise! Additionally, you get hit with additional early termination fees and penalties.
Your credit hurts , just like defaulting on a car loan does, if you don’t make lease payments. Thus, if you must pay for the car, you may also keep it and use it.
Option #2: Buy the vehicle
Whether you should buy a car or at the conclusion of the term depends on what price the dealer offers you. Purchasing it might be a good idea if the market value of the vehicle is higher than the cost. But when the car is worth less than what the dealer asks, it is obviously a bad idea to buy it.
Choice #3: Transfer the automobile lease
Transferring your vehicle lease is the best option, but is a slam-dunk. Additionally, it is called a lease assumption and a lease trade. It’s very affordable and doesn’t hurt your credit score.
A lease transfer is when one person assumes all the rights and responsibilities of the arrangement and takes over the payments of a leased vehicle with the approval of the leasing company. The individual with the lease is called the person who wants to assume that the lease is called the buyer and the seller.
So what should you do?
Remember that leasing is another form of financing, so it’s still very important to negotiate the price of the car if you plan on buying it . Concentrate on the capitalized cost more than the amount of your payment. You can use a Buy or Lease Calculator to help crunch the numbers.