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Auto Lease vs. Loan: Which Way Do I Go?

Making the Right Choice: To Lease or Finance an Auto

By Mindy

In the market for a new car? You may want to be, given the super-low prices and great deals offered by car makers lately. But even if you’ve made the decision to get a car, you still have to decide how to go about it. Your options, if you’re like most people, include financing or leasing a car. Both options have advantages and both options can save you money – but in different ways. Read on to discover the pros and cons of financing an auto purchase versus leasing one.

Understand the difference:  financing versus leasing

Before you can make any decision about acquiring a car, you must understand the difference between financing and leasing.

• Financing an auto. Financing an auto means taking out a loan to buy a car. The car bought can be new or used. Either way, to finance the purchase you borrow money from a bank or other lending agency. You’re required to pay back the total sum of the money borrowed, plus interest, over a specified period of time. The vehicle serves as collateral for the loan, so if you ever default on payment the vehicle can be taken and sold by the lender. Once you have paid the loan in full, you own clear title to the vehicle.
• Leasing an auto. When you enter into a car lease, you sign a contract that basically allows you to rent a car for a specified period of time. You pay monthly installments which reflect both an interest rate and the depreciation of the value of the car you’re leasing. Most people go through car dealerships to lease autos, but the actual lease they sign is generally owned by a leasing company to whom the dealership has sold the car. The company then leases the car to you under the terms set between you and the dealer.

The pros and cons of leasing a vehicle

In general, leasing a car means you pay less in average monthly car payments – sometimes as much as 60% less – than you would in loan payments. This is because you are not paying a portion of the whole car as you would in a financing agreement. Instead, you’re paying the portion of the car’s value over the lease period.

Besides the lower monthly payment, you also have lower upfront costs. Down payments are smaller when you lease a car, though you can generally elect to increase your down payment in order to reduce your monthly payments.

Because of the lower car payment, you can technically drive a nicer car under a car lease than you could by financing a purchase with a conventional loan.

On the downside, you don’t build equity when you lease a car. Even with lower payments than required for financing an auto, you end up paying a high price over time (usually a three-year period) with nothing to show for your expense at the end of your lease agreement. In addition, when your lease agreement terminates, you no longer have a car to drive.

The pros and cons of owning a vehicle

The current economy has put the auto industry into one of its worst tailspins to date. But on the upside, this tailspin has given buyers incredible leeway for negotiation. Not only are car makers willing to offer a flurry of deals and bonuses for anyone willing to purchase a new car, they’re also willing to negotiate.

If you have the money to buy a vehicle outright, now is the time to do it. You’re not likely to find better prices than the low numbers currently being posted at dealerships around the country.

If you don’t have the cash available to buy a car, financing it with a loan is your next best option. Even if you have to pay interest on a loan, the current market for automobiles still offers you some great buying options.

The downside to financing a car is that you pay high fees with lots of interest over a long period of time. The upside is that you build equity in your car over that time period. In addition, at the conclusion of your loan you own your car and get to keep it for as long as it will drive.

Other things to consider

Ultimately, your own personal finances will dictate whether you’re better off financing or leasing a vehicle – and a lot of it will have to do with how much you can afford to spend on a vehicle each month.

You should also consider whether it benefits you to write off your vehicle on your tax return. Your overall tax fees may be helped significantly if you’re able to factor in your loan interest rates or the number of miles you drive in a given year – all things you can include when you lease a vehicle.

Make the right choice with real numbers

The Internet offers a variety of free places to calculate the best deal for your financial situation. By taking advantage of an online car loan calculator, you’ll be able to determine which scenario makes the most sense for you and your pocketbook. It’s important to look at specifics when it comes to crunching numbers for large scale purchases like cars. You may have the potential to save thousands of dollars by choosing one option over the other, so don’t simply guess at the best choice for you.

Be informed about your options

When it comes down to it, your best bet in making the right decision between financing or leasing an auto is to be informed. Take the time to explore your options and talk to car dealers about prices. Shop around for loans and get estimates. Compare the hard numbers by using a free online vehicle loan calculator, and pick out the scenario that works best for your own personal situation.

6/10/2009

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