Are monthly payments necessary?
Unless you’re in the position to pay cash for a new or pre-owned vehicle, you’ll need to establish a payment plan to obtain that vehicle. Two options exist – taking out a loan or leasing.
How do loans and leases differ?
When you take out a loan, all of the money used to pay it off applies to your eventual ownership of the vehicle. The initial down payment and principal on the loan cover the total cost of the purchase. Lease payments, however, apply only to the use of the vehicle. The total sum of payments covers the vehicle’s depreciation over the time you drive it and is usually less than the outright price of the vehicle.
What factors determine the purchase price at the end of a lease?
Most leases rely exclusively on the residual value in determining the end of term purchase price. These closed-end deals require you to pay the fixed residual amount regardless of the actual market price. Open-end leases work differently in that the actual market value helps determine the purchase price. As a customer you are responsible for any difference between the residual and actual value when buying outright.
What are the restrictions of driving a “borrowed” vehicle?
Annual mileage restrictions are a major limitation for customers who choose to lease. Lessors want their vehicles returned in saleable low-mileage conditions, so they place mileage caps on them. A typical yearly figure is between 12,000 and 15,000 miles. Beyond the established limit, fees accrue on a per-mileage basis, usually in the range of $0.10 to $0.25 per mile. So if most of your driving is local, leasing makes sense. However, if you consistently tack on 500 or more miles a week, definitely look into a loan.
Leasing ensures that you’ll always drive a late-model vehicle, won’t have to pay for warranty-covered repairs and won’t have to bother with re-selling at the end.
What are the other virtues of a loan?
Loans are also sensible for those who want to customize their vehicles, plan on keeping their cars for long periods of time and plan to re-sell their vehicles to help recoup the costs of ownership or expenses of additional cars. For those who quickly wear vehicles out, loans may be safer bets as lessors often add “excessive wear” charges if the car is returned with wear over the limits established by the contract.
Which option makes the most sense?
The answer to this question depends on how you plan to use the vehicle. If you like the idea of driving a more expensive vehicle for a smaller monthly payment, leasing is a great option. However, if eventually owning the car is important, financing with a loan is the way to go.
How are monthly lease rates determined?
Down payment amounts may range between 10 to 20 percent of the vehicle’s total cost, although some purchases require no down payment. A typical loan period is five years with an annual percentage rate around 8 percent. Some manufacturers offer lower rates, but be sure to investigate any associated conditions or clauses.
Are loans available for used vehicles?
Yes, although they function somewhat differently from new car loans. A down payment of 20 percent or more is often required and the interest rate can be a point or two higher. Understandably, banks are more hesitant to loan money for used car purchases, as they would rather own a newer car if the borrower defaults. However, the market is full of good used vehicles, many of which are created by short term leasing.
Can extra fees and charges be financed?
Yes, registration, taxes, extended service plans and other supplemental charges may be included in the financing plan.
Have More Questions?
Please feel free to contact us if you’d like more information, we are always happy to answer any questions you may have.