Should I take out a car loan or should I lease a car; which is better
Buying a new car or leasing a new car, two simple statements that cause major debates from so many different people.
This is really a matter of personal choice and what you feel is the best use of your money.
One of the simplest answers is in how long you normally keep a vehicle and what the condition of these vehicles are when you go to trade or sell them.
Take a look at some of the common reasons why someone would lease a vehicle.
- you do a lot of driving and need a reliable vehicle
- you like to trade in a car every 3 years
- you are tired of wasting your money on expensive car repairs after the warranty is expired
- you travel a lot and don't want to worry about breaking down
lease payments are lower than car loan payments
- Now look at some of the reasons someone would rather take out a loan for a new car
- they have gotten an incredibly loan interest rate
- you want something to show for all the money you have spent
- you normally keep a vehicle for over 5 years
- you keep your cars in excellent working condition so repairs are kept to a minimum
When it comes right down to it leases and loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.
When you buy a car, you pay for the entire cost of a vehicle over time, regardless of how many miles you drive it. You make a down payment or trade in your old vehicle, pay sales taxes, an interest rate determined by your bank. Which is then all added in to the cost of your loan which then effects your monthly payment.
When you lease, you pay for only a portion of the vehicle's cost, which is the part that you use up during the time your lease is valid for. You have the option of not making a down payment, you pay sales tax only on your monthly payments in most states, and pay a cost that is similar to the interest rate on a loan.
Lease payments have two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it.
Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the vehicle purchase price, while the finance charge is interest.
All vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, it's money you never get back, even if you sell the vehicle in the future. Vehicles can loose $5000.00 or more the second you drive off the lot.
The remainder of each loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value. The longer you own and drive a vehicle, the less equity you have.
Here is how I decided for myself whether I should lease a car or get a loan for a car. I didn't want my wife to drive a unreliable vehicle out of town. Especially with the kids in it. In the past I have never been fortunate to have a vehicle that didn't require large repair bills sooner or later. I like the idea that at the end of the 2, 3, or 4 year lease I can take the car back.
This is what I did - I went to the car dealership and picked out a car I thought I could afford the loan payments on. Looked at the warranty and then the cost of extending the bumper to bumper warranty. I then looked around to find a used vehicle that was as close to this one as possible and noted the value. I lowered the value by 40% for dealership markup. I then went to the bank and got them to work out how much the loan would cost me for five years. Read: How to get Cheap Antique Auto Insurance
I then asked the auto dealership agent to calculate all the costs on leasing the car including any mileage costs at the end of the lease. I looked at a 3 yr lease and 5 year lease. Warranties are getting better so I opted for the 6 year lease.
With these two values I determined that leasing for me was better. My reasons where based on my needs and my families. I reasoned if I took out a car loan and my payments to pay off the car where say 600 dollars a month, at the end I would trade in the car and start making payments all over again. If I leased then at the payments where a little lower and I also got a new car at the end of every lease, if I chose to lease again.