Lease vs. Loan: Thoughts on Different Ways of Financing your Vehicle Purchase
I don’t watch as much TV as I used to. When I was in college, it was my escape. Now that I’m out of college, I found better things to do with my time. But, when I did watch more TV, the channels I frequently watched showed lots of car commercials. Probably because the channels I watched were also assumed to be frequented by people who were suffering from a mid-life crisis and would be more apt to buy a new car. You know the commercials: A slick car speeding down the road (with a warning on the bottom saying that it’s a professional driver on a closed track), throw in a couple pretty girls and at the end it tells you how much they start at per month. Many people assume that getting a loan would be the same as that lease cost, but it’s not. Today we’re going to look at that difference more in detail.
When you lease a car, it’s more comparable to a rental than a loan. You are paying the leasing company (usually the manufacturer or the dealership) to use their car every month. Basically, the leasing company will “buy” the car for you and then you pay them back. In this process, there are also stipulations you must follow regarding the mileage you use in a year, which is where leasing companies will get you. You may be paying less a month, but say that you’re restricted to 10,000 miles a year. If you go over that mileage, you may get charged per mile/per hundred miles/per thousand miles.
Another interesting fact about leases is that you never technically own the car. Every year the value of your vehicle is assessed, and your payments may change according to that value. At the end of the term (usually 2-4 years), you need to return the car or buy it for the residual value. They also assess the wear and tear, which at that point you may be charged even more money if it’s determined that your car exceeded the wear and tear as stated in the contract. Although the payments may be less monthly, unless you take extreme care to make sure your car is in tip-top shape, you may end up paying more in the long run. On the other hand, you may end up being able to get a really nice car every 2-4 years, which is always nice and reliable.
On the other hand, a loan is your standard borrowing money from a financial institution that you will pay them back over a period of time. Loans may cost more monthly and have more up-front costs than a lease (you usually don’t have as many taxes or fees for a lease), it may be more beneficial if you plan on keeping your vehicle for the long haul. I always say that I’m going to run my current vehicle into the ground, so for me, a lease would be silly. I try to keep a car for 8-10 years. Also, loans make you the owner of the car, so if you go over on mileage one year or something, you’re not stuck paying fees or charges that you wouldn’t have otherwise.
Loans are also good if you’re thinking that you’re going to get a car that’s a couple of years old. Many companies don’t lease used cars, and if they do, the stipulations are more complex and you’re more likely to end up paying a lot more than you would have just getting a loan.
So, if you’re considering leasing a new car or getting a loan for one, these are some things that you should keep in mind when you’re making your decision. Always consider all of your options, and as I always say, do your research!
