There are three ways to purchase a car.
Finance, Lease or
Pay cash
If paying cash is not an option, then you are limited to financing or leasing. Leasing is simply paying for the portion of the car you intend to use. In order to understand leasing you must first understand the terms used when leasing. Here is a quick list of words you will hear when talking about leasing to a dealer.
Cap cost: The amount the dealer sells the car to the leasing company for. This is one of the factors that determines how much your lease payment will be.
Residual: The value of the vehicle at the end of the lease term.
Money factor: The interest rate the lease company charges the consumer for their vehicle. It should be noted that this is factored on the entire purchase price of the car, not just the portion you are paying for.
Lessee: The lease company
Lessor: The consumer
Note: If you intend to use your vehicle for business, not just to commute, it might be an excellent idea to consult you C.P.A. or your tax preparer to find out if there are tax reasons that would benefit you.
Now that we understand the terms used it’s time to look at the pros and cons of leasing vs. buying your next car. Most consumers today feel the need to finance their cars at 60 to 72 months in order to get the payments in line with their budgets. The higher cost of cars, trucks and sport utility vehicles of today almost dictates we go this route. This creates a situation where the consumer finds themselves in a reverse equity situation for the first 2/3rds of their purchase. This occurs because car loans base the interest rate on the unpaid balance. In the first couple of years of the loan the balance is high, so the interest portion of the payment will be greater than the principle portion. Only until the balance goes down will the interest portion go down significantly. If the consumer wants a new vehicle every 2 or 3 years and they continue to finance at today’s longer terms, they will constantly find themselves owing more than the vehicle is worth. (Reverse equity)
This is where leasing becomes attractive. Leasing estimates the duration you want to keep the car, estimates the amount of miles you plan to put on the car, and figures the payment so you can trade at that time. As long as your lifestyle or driving habits don’t change the lease will prove to be an effective way for you to trade in a shorter duration. It is important that you correctly estimate your miles or you could end up owing a substantial amount at the end of your lease. The only other factor you need to be aware of is lease companies require higher insurance limitations than finance companies do. It’s always a good idea to check with your insurance agent before doing any auto leasing.
If you are the type of consumer that buys a car and keeps it for long periods of time, putting tons of miles on it, you should defiantly stick to purchasing. |
