When it comes time to replace your vehicle, you have three options. The most economical option is to pay cash for your new ride, but few people have such deep pockets. The next and most common option is to take out a loan and finance your purchase. For some, however, leasing may make more sense.
If you happen to have the financial resources available, paying cash can save you thousands of dollars in interest payments. For example, paying cash instead of financing a $24,000 car at three percent interest over four years can save you upwards of $3,000 over the life of the loan.
For the vast majority of consumers, the choice comes down to financing their purchase or leasing.
Monthly lease payments typically run between 30 percent and 60 percent less than loan payments, but it’s important to remember that at the end of the lease term you won’t own the vehicle. Once your loan is paid off, you’ll own a vehicle with resale value and your only expenses will be taxes, fuel, insurance and maintenance costs.
Monthly loan payments consist of a principle payment, which is applied to the original amount of the loan, and interest charges which is how the finance company or bank makes its money. Monthly lease payments include depreciation charges and interest charges.
Unlike loan interest rates, which are clearly stated, lease interest rates are a little less straightforward. Be sure to ask the dealer or leasing company to provide you with the money factor of the lease in addition to the interest rate. Multiply the money factor by 2,400 to come up with the actual interest rate of the lease.
If you’re considering a lease, keep in mind that inexpensive auto leases are not as common as they were before the financial markets collapse of 2008.
You should also select a lease term that doesn’t exceed the vehicle’s bumper to bumper warranty. In most cases, this will be 36 month or 48 months. It simply doesn’t make sense to have to pay for repairs on what is essentially a rental vehicle.
Even if you don’t plan to purchase the vehicle at the end of the lease, you should consider the resale value of the vehicle you’re considering leasing. The higher the resale value, the lower the depreciation costs, and hence, the lower the lease payments.
Be sure the lease agreement includes enough mileage for your needs. Otherwise you may be hit with a big penalty when you return the vehicle at the end of the lease period. Most lease agreements will allow you to pay for extra mileage up front.