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.
It's not possible to simply say that one is always better than the other because it depends on your own particular situation and preferences. You must not only look at the financial comparisons but also at your own personal priorities what's important to you. Is having a new vehicle every two to three years more important than owning your vehicle? Are lower monthly payments more important than long term savings? Can you afford to pay for a large repair if something breaks? Does the risk of a major repair or depreciation outweight the other benefits of owning?
Leasing a vehicle is a lot like renting an apartment. The vehicle is yours to use for a set amount of time or mileage, but the leinholder owns the vehicle. The monthly payments for a lease are significantly lower than with traditional financing. Since the vehicle typically remains in warranty, there is also a lot less risk associated with leasing. This makes it a great option for people who are looking for a reliable car for a low monthly payment.
There are a lot of benefits of leasing. Besides getting a new vehicle every few years, the low monthly payments and little to no money due at signing make it a popular option for lots of people. Check out our guide to the benefits of leasing to learn more.
In a lease, the monthly payments are determined by the expected depreciation of the vehicle plus finance charges, fees, and tax. For example, if you were to lease a $20,000 Honda Accord Sedan, it may be worth 60% of the MSRP at the end of the 36 month term ($12,000). The value at the end of the lease term is called the residual value. This vehicle is expected to depreciate $8,000 ($20,000 MSRP - $12,000 Residual). Since the bank owns this vehicle, the bank charges a finance charge based on the value of the vehicle over the term of the lease. This vehicle starts out at $20,000 and ends at $12,000, so the leasee would be borrowing an average of $16,000 for 36 months. The leasee is also responsible for the normal fees associated with purchasing a car as well as the $595Lease Acquisition Fee. To estimate the monthly payment, simply add the depreciation, finance charge, fees, and tax, then subtract the down payment and divide the result by the term of the lease. It's sometimes a bit more complicated, but that's a general overview of the process.
If you typically keep your vehicle for five to 10 years, then financing may be your best option. Financing a vehicle means you can drive as many miles as you wish and make changes to your vehicle's appearance. Buying also gives you the pride of ownership.
In a loan, the monthly payments are determined by dividing the cost of the vehicle plus finance charges, fees, and taxes by the term of the loan. For example, if you were to finance the purchase of a $20,000 Honda Accord Sedan, the loan would be for this full amount. The bank charges a finance charge based on the outstanding balance of the loan, which would be borrowing an average of $10,000 for a 60 month loan. The purchaser is also responsible for the normal fees associated with purchasing a car. To estimate the monthly payment, simply add the loan amount, finance charge, fees, and tax, then subtract the down payment and divide the result by the term of the loan.
When you finance, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales tax in cash or roll them into your loan, and pay an interest rate determined by your loan company. You make your first payment a month after you sign your contract.
When you lease, you pay for only a portion of the vehicle's cost, which is the part that you "use up" (depreciation) during the time you're driving it. 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 money factor that is similar to the interest rate on a loan. With leases, you may also pay extra fees and possibly a security deposit that you don't pay when you buy. You make your first payment at the time you sign your contract.