The following compares the pros and cons of buying and leasing, the economics of each, and why you might choose to finance one way or another.
You can buy a car with cash or finance it and make monthly payments. Either way, it's yours.
If you finance a vehicle, you'll have to meet the obligations required by the lender, like a certain down payment amount and timely monthly payments. If you don't, they have the right to repossess the vehicle.
Most drivers don't have the cash to pay the full price of a vehicle upfront, so most people choose to finance through a dealership, bank, credit union, or private lender to cover the vehicle's value, plus interest, over a period both parties agree on, typically three to six years.
Lenders will look at your income, your credit score, and the cost of the vehicle to determine the terms and interest rates on your auto loan. After negotiating and signing some paperwork, the vehicle is yours to do as you please.
If you're financing a car, the bank will probably request a down payment as a form of security. Your down payment should range between 10% and 20% of the vehicle's MSRP to secure your car purchase. This also reduces the cost of your monthly payment.
You can also trade in another vehicle and use any equity toward your down payment. The amount of the down payment is usually based on the lender's requirements and your credit score.
New cars depreciate over time. In fact, within the first year of ownership, a vehicle will lose nearly 20% of its value, according to Trusted Choice Insurance. The amount a vehicle depreciates varies depending on its market value, make, model, and even the year it was manufactured.
Despite depreciation, buying a car is a great way to build equity, as long as your payments outpace the rate that its value decreases. You can use this equity to pay for your next vehicle when you're ready to get one.
Your vehicle will be worth whatever you can sell it for in the future and that depends on how well you maintain it. (Be smart and protect your investment with regular scheduled maintenance by a factory-authorized facility!)
Once you've paid off what you owe on your contract, that's it. Your vehicle is 100% yours. The lending institution will send you a lien release as proof that the vehicle is paid off and all yours.
You don't own the car when you lease. You're paying for the use of the vehicle, but the finance institution that you leased it through actually owns it. This is usually why you pay less per month in a lease than if you were to buy the car.
Leasing also protects drivers from unexpected drops in value from unexpected circumstances. For example, if the vehicle you lease depreciates due to a recall, this won't affect you the way it would if you purchased a vehicle.
Leases often don't require any type of a down payment. All you usually have to pay is the first month's payment, a security deposit, the acquisition fee, and other fees and taxes. But, as with a purchase, if you want to lower your monthly payments, you can always pay more upfront.
In most leases, you don't end up owning a vehicle. Therefore, you won't be responsible for selling it. That's the financial institution's job. However, you may have mileage limits-typically between 12,000 and 15,000 miles per year-and wear and tear guidelines that, if you exceed them, could cost you extra money when you turn your vehicle back in.
Most lease terms range between two and three years, which may be attractive to drivers who like to drive a new car every few years. Leasing could also allow you to drive more car for less money, especially if you can only afford to buy a car at a lower market value.
Most people return the vehicle at the end of the lease term, but some like to purchase it during their lease or at the end. Others like to trade it in before their lease is over. Just ask us about these different options before signing any paperwork and we'll make sure that you have your lease set up the way you want it.
The best cars to lease are those with the best book value after the term of the lease. Since they depreciate less, you pay less. Review the lease ratings to see which cars retain their value.
Shopping for a new car is always exciting, but it can be difficult to choose between buying and leasing a vehicle. If you're on the fence over buying or leasing, talk to a car dealership near you to discuss your options. They'll go over each option and help you find a form of payment that makes the most sense for your financial situation.
The finance center at Winn Volkswagen of Woodland Hills offers a variety of leasing and financing options for the brand-new Fords and used vehicles in our inventory. If you're ready to lease or buy your next vehicle, contact us online.