Financing VS Leasing

[Truvidien]

I was hoping someone could explain to me what the difference is between the two when it comes to vehicles? When I was at the dealership a few months ago, since a car that I was looking at was a bit out of my budget range due to having a low down payment the salesman said that I should look into leasing it and it will fit your budget. I declined and said no thanks. Basically at the time I had no clue what it was and didn't wanna spend mine or his time for it not being worth it to either of us.

I've always been told that I never should lease cars. Cause you never will own them. Is this true? I read that the dealership will ask you once your lease is done that if you wish to buy or give the car back. A coworker of mine today was telling me she highly recommends that I should lease. She says she is leasing her van and it is working out for her BUT she said it was for 72 months and once the lease is paid the vehicle belongs to her.

So I'm a bit confused.. Is it better for people to finance or lease? I'm not looking to rent and vehicle hop.. Is this what leasing comes down too? I'm not looking to get any vehicle soon. I'm just basically wanting to make sure I know what everything is before I go in walking blind.

Thanks!

[jpg7n16]

The difference is the difference between renting and buying. I'm sure you've heard that when you rent an apartment, you have to sign a lease.

They let you do the same thing on cars now. But typically, the rental costs of cars is higher by comparison. This method usually requires the least amount out of pocket today, but is typically the most expensive way to have a car.

Financing a car, means borrowing a bunch of money from the dealership and using that money to purchase a car. You borrowed the money, you have to pay it all back plus interest. However, since you actually own the car you also have the option of selling the car and using the proceeds to pay off the loan.

There is a 3rd option where you don't borrow money, but just buy the car outright. That's paying cash, and in the end is the least expensive way to own a car (in the vast majority of cases).though obv, this method requires the mot cash up front.

[Truvidien]

The difference is the difference between renting and buying. I'm sure you've heard that when you rent an apartment, you have to sign a lease.

They let you do the same thing on cars now. But typically, the rental costs of cars is higher by comparison. This method usually requires the least amount out of pocket today, but is typically the most expensive way to have a car.

Financing a car, means borrowing a bunch of money from the dealership and using that money to purchase a car. You borrowed the money, you have to pay it all back plus interest. However, since you actually own the car you also have the option of selling the car and using the proceeds to pay off the loan.

There is a 3rd option where you don't borrow money, but just buy the car outright. That's paying cash, and in the end is the least expensive way to own a car (in the vast majority of cases).though obv, this method requires the mot cash up front.

But leasing would cost you more in the long run for the car right? I just like making one payment and being able to do what I want with whatever I am paying for. So is leasing not the best option? I want to have something to show for years down the road for whichever vehicle I am or have been making payments for.

[humandraydel]

A coworker of mine today was telling me she highly recommends that I should lease. She says she is leasing her van and it is working out for her BUT she said it was for 72 months and once the lease is paid the vehicle belongs to her.

I think your coworker is the one who is confused. With a lease, at the end of term, you give the car back! That is why a lease is "cheaper" - because instead of financing the whole price of the car you only finance the depreciation of the car.

For example, say you want a $20k car. At the end of the 5 years, the car is worth only $10k. Since you are giving them the car back at the end of the 5 years, you only finance the $10k worth of depreciation. Of course, in reality they probably charge you for $14k worth of depreciation - in other words, they usually make a killing on leases.

[kv968]

But leasing would cost you more in the long run for the car right? I just like making one payment and being able to do what I want with whatever I am paying for. So is leasing not the best option? I want to have something to show for years down the road for whichever vehicle I am or have been making payments for.

If you want to be able to do what you want and have something to show for it years down the road, leasing isn't for you.

First of all, leases have a cap on how many miles you can put on the car. Typically 12-15k per year. So a 36 month lease would allow you 45k miles @ 15k/yr and anything over that and you get charged a per mile rate (usually $0.12-0.18/mile). You also have to keep the car in great shape since it will be inspected if you turn it in at the end of the lease.

As far as "something to show for years down the road", you can always purchase the vehicle at the end of the lease. Although if you figure you have a 36 month lease, you'll most likely end up financing the residual for another 36 at least so that's a total of 6 years that you'll be paying for the car. Also if you do decide to purchase it you would now have to get a used car loan which has a higher interest rate than a new one.

For example, I found a Toyota Camry lease for $165/month for 36 months, a $2000 down payment, a $177 documentation fee and the first month's payment plus tax, tags, etc... It has an MSRP of $23,554. The lease has a residual value (what you'll owe at the end of the lease) of $13,745.

If you were to take this lease as it is your total and down payments (not including tax, tags and fees) would be $7940. The MSRP - your total payments ($23,554-$7940) would be $15,614. Since the residual value is $13,745, I'm assuming that they knocked $1869 off the MSRP.

Regardless, now you're 3 years out on the car and you can either turn it in and get nothing or pay $13,745 for it. If you were to not put anything down and finance it for another 36 months @ say 4.5%, your monthly payments for 3 years would be $408.87 and a total of $974 in interest.

If you were able to save up the residual value while paying the lease and ended up paying cash at the end it might not be too bad. However if you'd have to get a loan and extend it another 36 months or more you'd end up paying way too long on a depreciating asset.

I've never leased a vehicle so some of my thinking may be wrong and someone can correct me, but I think leases are generally a bad idea and it's mostly people who just focus on what they're paying per month instead of what they're getting with the package who enter them.

[Truvidien]

I was talking to my manager (for another opinion) about it and she was saying that she leases her vehicle. And it costs around 25k she says by the time her lease is up she will owe around 14-15k after 3 years. However she says once the lease is done you can purchase the car or return it. She wants to buy this one so she says they will tell you how much you owe. You can either pay cash or finance the rest of it. So if someone were to finance the other difference would your payment go up or stay the same amount? She says the salesman guaranteed her the car would stay the same payment that she is currently making. She also informed me that for leasing your credit must be really good to do this.

I think my coworker is confused and mixed up with financing as was previous posted up top. The only thing I would hate about leasing is having to get oil changes and keep the car up to par during the lease. Right now, I'm just looking for my best option and it will still be 14 months that I may be able to get one. (hopefully) By then I should be able to put down a reasonable down payment on something that will fit my price range.

So even if leasing will costs less as far as monthly payments depending on your interest rate.. Doesn't seem to be for me?

[disneysteve]

she says once the lease is done you can purchase the car or return it. She wants to buy this one so she says they will tell you how much you owe. You can either pay cash or finance the rest of it. So if someone were to finance the other difference would your payment go up or stay the same amount?

That's true. Once your lease is up, you have the option of turning the car in or buying it for the residual value. You can either pay that in cash or fianance it. How much the payment would be depends on the terms of the loan.

The only thing I would hate about leasing is having to get oil changes and keep the car up to par during the lease.

I'm totally opposed to leasing but this statement doesn't make any sense. If you buy the car, you still need to get oil changes and take care of the car, do routine maintenance, etc.

[Truvidien]

That's true. Once your lease is up, you have the option of turning the car in or buying it for the residual value. You can either pay that in cash or fianance it. How much the payment would be depends on the terms of the loan.

Does your payments ever scale up and down while you are leasing the car? I would like to have where the payment stays the same. As you can tell I'm completely lost when it comes to this. So if I get this right.. Financing means you own the car or will be once the vehicle is paid off. As to where leasing is considered renting the vehicle and you have the option to buy the car out right once the lease is done or finance the rest of the vehicle but with a higher payment?

[disneysteve]

Does your payments ever scale up and down while you are leasing the car? I would like to have where the payment stays the same. As you can tell I'm completely lost when it comes to this. So if I get this right.. Financing means you own the car or will be once the vehicle is paid off. As to where leasing is considered renting the vehicle and you have the option to buy the car out right once the lease is done or finance the rest of the vehicle but with a higher payment?

With a lease, the payment is fixed for the term of the lease.
With a loan to purchase, the payment is also fixed for the term of the loan, so no fundamental differenece there.

The huge difference is with the lease, you are just renting the car. With the loan, you are purchasing the car.

About the only time a lease is the way to go (not that it is a good idea but it makes the most sense in the situation) is for someone who absolutely insists on getting a brand new car every 3 years. If for some bizarre reason, that's your intent, leasing is cheaper than buying because of the rapid depreciationn during the first couple of years.

For everyone else, however, leasing is a colossal waste of money. It commits you to eternal monthly payments as opposed to buying where you could have payments for 3 years and then be payment-free for as long as you keep the car (if you didn't pay cash in the first place).

I bought my car in 1998 and my wife's car in 2002. We took a loan for mine and paid cash for hers so we have not made a single car payment in nearly 10 years. Trust me. That has had a hugely positive impact on our overall financial situation over the past decade.

[kv968]

Does your payments ever scale up and down while you are leasing the car? I would like to have where the payment stays the same. As you can tell I'm completely lost when it comes to this. So if I get this right.. Financing means you own the car or will be once the vehicle is paid off. As to where leasing is considered renting the vehicle and you have the option to buy the car out right once the lease is done or finance the rest of the vehicle but with a higher payment?

No your payments won't scale up or down but neither will they if you finance with a fixed rate. And as far as your second question, reread these numbers:

For example, I found a Toyota Camry lease for $165/month for 36 months, a $2000 down payment, a $177 documentation fee and the first month's payment plus tax, tags, etc... It has an MSRP of $23,554. The lease has a residual value (what you'll owe at the end of the lease) of $13,745.

If you were to take this lease as it is your total and down payments (not including tax, tags and fees) would be $7940. The MSRP - your total payments ($23,554-$7940) would be $15,614. Since the residual value is $13,745, I'm assuming that they knocked $1869 off the MSRP.

Regardless, now you're 3 years out on the car and you can either turn it in and get nothing or pay $13,745 for it. If you were to not put anything down and finance it for another 36 months @ say 4.5%, your monthly payments for 3 years would be $408.87 and a total of $974 in interest.