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Your Next Car--Should You Buy or Lease?

To know what's best you'll need to understand the complexities and major differences between buying and leasing cars.

By
Laura Adams, MBA,
Episode #089

Leasing can certainly make vehicles more affordable in the short term… but does that mean it’s the best decision? Not necessarily. In this episode we’re going to look at the fundamental differences between leasing and buying a vehicle for personal use. Then next week in Part 2 we’ll discuss lots of specific considerations that will help you know what's right for you.

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What's Better, to Lease or Buy?

Whether to lease or buy a car is a tricky question with many variables to take into consideration. Leasing has become popular as the cost of new cars has skyrocketed above reach for many buyers. But every buyer’s situation is different, so it’s impossible to give a blanket answer whether leasing or buying is best because monthly payments are just one factor that should influence your decision to lease or buy.

Differences Between Leasing and Buying Cars

So what are the fundamental differences between a lease and purchase loan for a car? A car loan finances the purchase of a vehicle. And a car lease finances the use of a vehicle.

When you purchase a car with a loan, you finance the complete price of the vehicle less any down payment that you make. So if you buy a $40,000 car with a $5,000 down payment, you'll make up the difference by borrowing $35,000. Your monthly payments are determined by your interest rate and the length of the loan. You can obviously drive the car as much as you like or decide to sell it or trade it for its depreciated resale value at any time before or after you pay off the loan in full.

On the other hand, when you lease a car, you finance just a portion of the vehicle’s price. This is the portion that you will use during the term of the lease. Let’s say you lease a $40,000 car that will be worth $30,000 in 2 years when your 24-month lease expires. This $10,000 in depreciation plus finance charges and fees is the basis for the calculation of your monthly payments. You usually don’t have to make a down payment on a car lease, but may be required to pay a security deposit. At the end of the lease term you can return the car or purchase it at a depreciated resale value.

This is why the monthly payments of a lease can be much lower than the payments of a purchase loan. Loan payments are higher because they include payoff of the principal balance (that was $35,000 in my example) which allow the buyer to build up equity with each payment. The equity in your car is what remains of its original value that you can recoup at resale.

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