Eliminate Your Fear of Buying a Car: Loans and Leases

For many people, nothing tends to cause more confusion over the car buying process than deciding whether to finance using a traditional loan or to enter into a lease. The answer of which one is the better choice is based on your personal situation and the key is to understand the advantages and disadvantages of both.

Both programs allow you to pay for the car over time with a fixed monthly payment. With a loan, you are financing the total cost of the vehicle (less any down payment) and, when the payments are finished, you obtain full ownership. A lease means that you are basically renting the car and at the lease’s end you must return it to the dealership or buy it. The payments for a lease are based on the difference between the selling price of the car and its residual value at the end of the lease; in effect, you are paying for the deprecation in the car’s value over the time that you are renting it.

While most customers are comfortable with the idea of a loan, a lease causes concern over two main areas: leasing got a bad reputation in its earlier days over hidden fees charged when the vehicles were returned, and a lease payment is more complicated to compute and therefore seems intimidating to the average person. The truth is that many states now require lease documents to clearly itemize all potential fees, as well as all of the basic numbers that are used to compute the monthly payment, and you can feel much more comfortable considering a lease for your new vehicle.

So, which one do you choose? That largely depends on your budget and your long-term plans for the vehicle.

A loan is ideal if:

You prefer the idea of owning your car, rather than renting it; this gives you more flexibility both to make modifications (such as installing a new stereo) and to change vehicles whenever you’d like.
You plan to keep the car longer than about three years and especially if you expect to drive it until it doesn’t run anymore.
The monthly payments for the car in which you are interested will be within your budget
A lease is a great choice if:
You tend to trade-in your car every few years, rather than keep the same one.
You either want a higher-priced car for the same payment, or a lower monthly payment for the same car, than a loan can provide.
You have not-so-good credit, since it is easier to get approved for a lease than a loan and there is often no requirement for a down payment (although there are usually “acquisition” fees for a lease)