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When it comes to obtaining a new vehicle, there are two main options: buying or leasing. Deciding which option is the best fit for your life can be overwhelming so we created a comprehensive explanation to make your decision easier. Read on for a thorough overview of leasing a vehicle including the benefits, difference between buying a car, and all of the necessary details.
What Is a Vehicle Lease?
People often view leasing as a long term vehicle rental – although this is not entirely accurate it is still a relatively good explanation. A vehicle lease involves an agreement between you and the lender. This lease allows you to drive the vehicle for a certain period of time, a set amount of miles, and a set amount of money.
The annual miles can be adjusted as needed by increasing your monthly payment. When you drive the lender’s car, you are causing its value to depreciate. Your monthly lease payments help offset the reduction of the vehicle’s value. Therefore, your monthly lease payments cover the depreciation of the vehicle.
Advantages of Leasing a Vehicle
People choose to lease rather than buy for a variety of reasons. Often, the biggest reason is the lower cost of leasing. With cars consistently increasing in retail cost, leasing a car can provide a more economical option.
Generally, leases offer a lower cost up front and lower monthly payments. A lease allows you to drive a new vehicle for significantly less money than buying one. Additionally, leases usually have fewer maintenance requirements. Most lease terms end prior to the car requiring major repairs. A leased vehicle is always covered under the manufacturer’s warranty so there is no need to be concerned if issues do arise.
Leasing a car also allows you to drive a new car on a frequent basis – even every few years if you desire. For anyone wanting to drive the latest car, this is a great option. The typical term of a lease is between two and three years. When purchasing a vehicle, most people own the car for an average of six to seven years. Exiting a lease is also easier than selling a car.
Leasing a Car: What You Need to Know
Following is a list of some of the most common terms involved in leasing a vehicle.
- Sales Price: The cost of your monthly payment is directly related to the price of the vehicle: a higher priced vehicle will have a higher monthly payment.
- Residual Percentage and Amount: A percentage-based number determines the residual value of the vehicle. A higher residual percentage indicates the car has a lower depreciation you will be responsible for. A higher residual value also equates to a smaller monthly payment.
- Annual Allotted miles: When you commit to a lease, you are permitted to drive a certain amount of miles each year. Exceeding your set mileage amount means you will be required to pay a fee (this fee is based on the amount of extra miles you drove). It is crucial to be well aware of the number of miles you drive each month and monitor your mileage total as the year goes on.
- Disposition fee: Leasing companies charge a disposition fee – usually around $300 to $600 – to pay for the cost of cleaning and selling your car at the end of the lease.
- Money factor: Money factor is equivalent to saying APR. Ideally, the money factor will be as low as possible.
Buying a Car vs Leasing
When deciding if buying or leasing a vehicle is the more appropriate option for you, it is important to understand the advantages and disadvantages of each. Below is a breakdown of some of the key differences between buying and leasing.
When you purchase a car, either by paying cash or financing it, you now own the car. Owning the car requires you to continue making monthly payments (if you financed it) and also makes you responsible for necessary repairs and maintenance.
If you enter a lease agreement for a vehicle, you are not the owner. A lease means you are paying to use the vehicle but the lender still owns it. This allows you to pay less per month than if you were to purchase the vehicle.
When buying a vehicle and setting up financing for it, you will most likely need to place a down payment. You can offset the down payment by trading in another car or using its equity. The amount you are required to put down is dependent on your credit score, the cost of the vehicle, and/or your lender’s requirements.
When leasing a car, no down payment is required. You are responsible for covering the first month of payment, any associated fees or taxes, the acquisition fee, and a security deposit. If you desire a lower monthly payment, you can pay a higher cost at the beginning of your lease.
Future Value of the Vehicle
When you buy a car, its true worth is equal to the price you can charge to sell it in the future. This price will be dependent on how well you maintain it and the type of vehicle you purchase. With most leases, there is no need to be concerned about your vehicle’s future value since you do not own it.
Upon paying off a car, you own it and will receive a title from the lender as proof of ownership. In the case of vehicle leases, most people choose to return the vehicle upon the completion of the lease term. Some may choose to purchase the vehicle during – or at the end – of the lease.