"Lease for only $199 per month!" "NO Money down! Drive off today with low monthly lease payments!"Judging by the advertising you see, you'd be hard-pressed to know that it was even possible to finance a new car these days. Every ad, promotion and banner you see is lease, lease lease and for good reason: New car leasing offers reasonable monthly payments, often with minimal down-payments. But they're not perfect and they're not for everyone. Read on to find out the difference between leasing and buying and some tips to figure out which one is right for you.
What is a Lease?
A lease on a car is much like a lease on an apartment: You sign a contract for a fixed price over a fixed period of time, usually between 24 and 36 months, with a fixed mileage. This price is usually far less than it would take to finance the vehicle outright. When the lease is over, you return the car to the dealer, pay for any damage and it's over. This means you pay less, but retain no equity — or liability— in the vehicle. And the end of the lease, you have nothing. That is, unless you buy the car at the residual value set at the time of the lease by the lender.
Your monthly payment on a lease is dependent upon a number of factors including the vehicle's price, your initial payment and something called a "money factor." This can be thought of in a similar way to an APR on a normal loan; the higher the number, the more expensive the financing of the lease is.
There is a little-used "one-pay" lease where you can pay the full amount of the lease at drive-off. This method requires you to drop thousands of dollars in one swoop, but will reduce the fees charged on the lease. It may also be easier to be approved for this type of lease, but there's a downside: all that cash won't be available to earn interest for you.
How is Financing Different Than Leasing?
Financing a new is different than a lease in a few crucial ways. The most obvious is that, despite trends towards 72- and 84-month loans, financing a car results in a higher monthly payment. This is because you own the car and retain both the equity and the depreciation. To see how this works, you can use our calculator to estimate your loan payment here.
Unlike leases, auto loans can be acquired at your local bank or credit union. Smart consumers will know their credit score, know average interest rates, and get pre-approved before shopping for their new car.
Which is Better: Loan or Lease?
Unfortunately, there's no clear cut answer here. Leases aren't always for people who want more car than they can afford and traditional financing isn't just for people who drive their cars until the wheels fall off. With that said, check our tips to determine which method might be right for you:
Why You Should Lease a Car:
- You don't want to put down a large chunk of money.
- You want a new car frequently.
- You're okay with having a car payment.
- You drive fewer than 15,000 miles per year. (High-mileage leases are sometimes available, but cost more.)
- You generally keep your cars in good, undamaged condition.
- You qualify to write off the lease. (Check with your accountant.)
Why You Should Finance a Car:
- A higher monthly payment is okay by your bank account.
- You drive a lot.
- You don't need a new car very frequently.
- Your cars tend to have a few dings, scratches and "character."
- You want to stop making payments at some point.
With some exceptions, there's no "right" or "wrong" way to get a new car so long as you consider the pros and cons of each approach. It's your money, your car and your future; we're just here to help you make a good decision.