Leasing vs. Buying a New Car
Pros and cons of lease payments and loan payments
Purchasing a new car is exciting, but figuring out the details of whether to lease or purchase can be a headache. Leasing is essentially renting a car for a set number of months, according to Cathy Pareto, president of Cathy Pareto & Associates, Inc., Investment Management and Financial Planning. To learn some of the benefits and disadvantages related to leasing a car, check out these tips from SmartMoney.com:
- Low down payments and low monthly payments. Many advertised lease deals feature a low down payment. Also, monthly payments are often lower because you’re paying off only the depreciation on your lease and not the car’s full value.
- Easy turnover. Once your lease is up, you can go back to your dealer (assuming your car is still in good condition) and drive out with a new car and a lease agreement, thereby eliminating haggling over trade-in values or trying to sell your old car.
- Ownership. When your auto loan is paid off, you officially own your vehicle.
- Early payoff advantages. Loans that don’t include early payoff penalties offer you the flexibility of ending the credit agreement ahead of schedule, thereby putting more money in your pocket from saved interest. Completing an auto loan ahead of schedule will also improve your credit score and free up more money in your budget for other things.
- Existing banking relationships. Your established relationship and history with your financial institution could make you eligible for benefits such as discounts on of your loan rate.
- No equity. Just like renting an apartment, your lease payments don’t go toward owning anything. Unlike making loan payments, you can’t look forward to one day finishing your payments and owning the car free and clear. Suze Orman, a famous financial advisor, says that “the problem is that you are subjecting yourself to a life of having to make a car payment every month. You never stop paying for your car, because you are always leasing—borrowing it—from someone else.”
- Spending more money. Leases come with a set limit of miles you’re able to drive and can charge you up to 12 to 15 cents for every mile over that limit. You also have to compensate for any damage or wear and tear to the vehicle when you turn it in. Additionally, if you’re involved in an accident, insurance will cover only the market value of the car, which could be less than what you still owe. An auto loan from your financial institution is another option to consider when buying a car. Theresa Custodio of eHow.com says, “An auto loan will give you the advantage of buying a vehicle with monthly payments you can afford. Auto loans also help build your credit rating, provided that you make the payments on time.”
- Credit rating. Everyone may not have the credit score to qualify for an auto loan. Also, a higher credit rating could result in paying a higher APR.
- Extra steps. You may need a cosigner, depending on your age, income and credit history. Also, there may be a brief waiting period for your loan to be approved.
If you have questions about purchasing your next vehicle, stop by for some answers.