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Tuesday, January 18, 2022

Pros And Cons of Leasing a Car

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Pros And Cons of Leasing a Car – The choice between buying and leasing a car is usually a tough call. Everyone has their reasons for opting to choose one over the other, and if you’re still struggling to make up your mind, hopefully, this video will make it a bit easier.

What does it mean to lease a car? When you decide to lease a car, you’re paying for the right to drive the vehicle for a certain length of time, usually three to four years. You’ll have to pay an initial amount as you leave with the car to cover taxes and fees. From there, you’re required to make monthly payments during the lease period to cover the cost of depreciation. Also, the number of miles you can drive is usually limited, and the vehicle has to be in stellar condition upon returning the vehicle to avoid extra charges.

What does it mean to buy a car? Buying a car means maintaining possession of the vehicle. People who are a little skeptical about buying a car are usually worried about the price, and although some are indeed expensive, you could always consider more affordable options like certified pre-owned vehicles and used cars. If the car is new and being purchased on loan, the monthly payments are usually higher than those you’d have to pay if you were leasing. However, once the payments are made in full, the car is officially yours. So, what are the pros and cons of buying and leasing a car?

Pros And Cons of Leasing a Car

Leasing a car Pros

1. Lower Monthly Payments.

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The monthly payments are considerably less than they would be if you were purchasing a car on loan. And it’s one of the reasons why people opt for a more luxurious car than they would otherwise afford. After paying the initial amount paying off the rest isn’t that bad. Sometimes you won’t even have to make a down payment before driving off with the vehicle.

2. You get to drive a new car every few years

If you’re one of those people who love the thrill of driving away in a brand new car, leasing might just be the thing for you. When the lease is up, you could easily return it and exchange it for your next new ride.

3. You don’t have to worry about maintenance

Most new cars have a warranty that lasts around three years. When you lease a car for this amount of time, most of the repairs are taken care of. You don’t have to worry about the long-term costs of maintaining the car. Now let’s look at the cons.

Leasing a car Cons

  1. Most leases come with annual mileage restrictions, which can range from 10,000 to 15,000 miles. And if you happen to exceed these limits, you have to pay a premium which goes for roughly 30 cents for every extra mile you drive.
  2. It’s expensive in the long run. By the time your lease is over, you’re going to have to either lease a new car or buy one, in any case, you’re going to be making monthly payments for a long time. But if you bought a car in the first place, you’re free from payments once you’ve paid off the loan.
  3. High cost of insurance. Insuring a leased car is usually more expensive than most people think. It’s on you to pay for comprehensive, collision, and gap auto insurance so as not to be liable for the car’s worth in the event of an accident. And because of the high insurance coverage, your insurance payments can be a lot higher than if you’d decided to buy a car instead.
  4. Leasing a car can be confusing. Leasing a car is complicated for a lot of people, and that’s why a lot of dealers love it. They stand to make profits in several ways if you don’t understand how everything works and if you’re not careful end up paying a lot more than you have to.
  5. Hard to Cancel. You can’t just walk away from a leasing agreement whenever you feel like it, and if you do, you’d have hefty penalties to pay for. But if you owned the car you could sell it whenever you didn’t want it anymore.

Buying a car Pros

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1. No mileage limits.

When you buy a car, you don’t have to worry about how many miles you cover. You can leave the dealer’s lot and drive as far as you want without having to think about the extra fees, unlike leasing which comes with a mileage cap. That’s why if you know you’re likely to cover a lot of miles, it makes more sense to buy a car instead. Beyond the costs of fuel and maintenance, there’s no extra financial cost for driving long distances.

2. No wear and tear charges.

When you buy a car, wears and tears aren’t that much of a big deal to you as it is for anyone who’s leasing, since they’re expected to hand it over in good condition. Moreover, you don’t have to pay for any potential repairs once the lease is over.

3. The ability to sell or trade-in the vehicle.

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When you pay outright with cash, the car is all yours immediately, and you can do whatever you want with it. Since you’re the owner of the vehicle, you don’t have to worry about what happens once the loan is paid off completely. If you feel the need to sell it or trade it in for another, it’s entirely up to you. Even if you’re purchasing it on loan and the lender still has title until you finish the payments, they’re usually no restrictions on what you can do with the car. With a lease, you’re essentially trapped until the contract is up unless you can find someone to assume your lease.

There are so many things you can do with it in terms of customizations, you can have spoilers, tinted windows, a new paint job if you want it. The only things limiting you are your sense of good taste and the depth of your pockets.

Buying a car Cons

1. Buying a Car Is More Expensive in the Short Term.

You’re probably going to spend more each month if you choose to buy a car as opposed to leasing. Most of the time, the monthly car payments are higher than lease payments for the same vehicle. Making them more expensive to pay every month, while you have a car loan. The cost of owning a car only becomes cheaper once the loan is fully paid.

2. You might also be required to make a bigger down payment.

You can reduce the size of the monthly payments when you put down more money at the beginning, but as a result, a huge chunk is taken from your savings.

3. Long-term maintenance costs.

Owning a car comes with a lot more responsibility. It feels good to say you own it, but you might not be as excited when something breaks and you have to get it fixed.

4. You May Have to Pay More Sales Tax

If you choose to lease, you’ll likely only have to pay the sales tax on the amount due at signing together with your monthly payments, depending on which state you’re in. The amount of sales tax is based on the negotiated price of the vehicle, in most states. In other states, you can deduct the amount of your trade-in but still have to pay tax on the majority of the vehicle cost. Making up your mind on whether to lease or buy a car depends on a careful assessment of your finances and your driving habits. You need to think about what you can afford to pay comfortably up front and roughly how many miles you spend on the road on average to find out which route would be more cost-effective for you.

How to calculate a car lease payment

So this part is a little interesting. As we have already established, lease payments are generally lower than the monthly loan payments for a new car. Monthly car loans are usually calculated based on the sale price, interest rate, and the number of months it’ll take you to repay the loan. Lease payments depend on factors such as sale price, length of the lease, expected mileage, residual value, rent charge, taxes, and fees.

To calculate lease payments, you’ll need to know the following values first.

  • MSRP: The Manufacturer’s Suggested Retail Price. This is the price that the manufacturer sets. E.g. Honda, Toyota.
  • Selling Price: This is the price of the vehicle as offered by the dealership.
  • Capitalized Cost: The total of all your monthly lease payments which can be reduced by the amount of down payment.
  • Residual Value: This is what the bank or leasing company estimates your vehicle to be worth after the lease expires.
  • Depreciation: In terms of leasing, depreciation refers to the total amount you finance, minus the residual value.
  • Term Length: This is the length of the lease agreement in months, which is usually 36 months.
  • Money Factor: In leasing, the money factor is used to calculate the interest charged on the lease. The money factor can be converted to APR by multiplying by 2,400.

Step 1: Monthly Depreciation

You first need to know the residual value to calculate the estimated depreciation. The residual is a value decided by the bank or leasing company. It’s a prediction, and the value of the vehicle by the time the lease is over will most likely be higher or lower than the residual. It’s usually estimated depending on the vehicle you’re leasing, the length of time you’re leasing it for, and mileage. So to calculate the residual, use the formula, Monthly Depreciation= (Capitalized Cost- Residual Value) / Months.

Step 2: Monthly Finance Charge

The formula to calculate the monthly finance charge is given as Monthly Finance Charge = (Capitalized Cost + Residual Value) × Money Factor.

Step 3: Base Monthly Payment

The base monthly payment is the initial payment before tax has been added. To calculate your base monthly payment, simply add your monthly depreciation to your monthly finance charge.

Base Monthly Payment = Monthly Depreciation + Monthly Finance Charge

Step 4: Monthly Lease Payment

The last thing that needs to be added is tax and lease taxation usually varies depending on the state. In some states, tax is levied on the lease payment, and some states tax on the full cost of the lease and require the tax upfront. Some even tax on the full selling price, resulting in a huge tax bill and very expensive leases. To calculate your monthly lease payment, you simply need to add the tax to your monthly payment using the formula:

Monthly Lease Payment = Base Monthly Payment × (1 + Tax Rate)

Step 5: Drive-off and Disposition Costs

At the inception of the lease, you should expect some upfront costs and maybe even a lease-end cost. These can include an acquisition fee, document fee, your first payment, registration fee, down payment, disposition fee, additional taxes, and more. To get a better understanding of these terms. The acquisition fee is set by the bank offering the lease and is rarely negotiable. The document fee is a fee that covers the dealership’s processing of your documents. The registration fee is a state-imposed fee for registering your vehicle. This is essentially a tax and is non-taxable. The down payment is an upfront cost that reduces the capitalized cost used to calculate your lease payment. The larger the down payment, the less your payments will be. A disposition fee may be charged at the end of your lease agreement, depending on your leasing agreement.

Additional upfront taxes include taxes due on the acquisition fee, document fee, down payment, trade allowance, and other upfront, taxable charges. To get your total drive-off, you’ll need to add all your drive-off costs and taxes. And if you’re making a down payment make sure it’s included. The total is the amount that’s due once you sign the lease. So, the question of whether to buy a brand new car or lease one is entirely based on your financial position. Both options have their pros and cons. So untimely the decision is up to you.

RELATED: 14 Rules of Money Management

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