The Decision to Purchase a Car

The decision to purchase a car is the second largest financial choice a person can make. There are a few options for vehicle financing. Since the majority of people aren’t paying cash outright for their vehicle, figuring out whether to purchase or lease the car can be overwhelming, intimidating and or confusing. Different elements come in to play when deciding whether or not leasing is right for your financial situation and lifestyle. Because the average consumer isn’t educated about the benefits of leasing a vehicle, leases are sometimes not even considered an option. I hope to highlight how there is value in leasing a vehicle, and more drawbacks when it comes to purchasing outright.

When leasing a vehicle, you can get more bang for your buck; meaning more features, and amenities from a higher trim level. The monthly payments are typically lower because you’re only paying for the depreciation of the vehicle during the specified lease term, and not the actual sales price. *** For example, on a $40,000 car, you’d finance the entire $40,000 purchase price with a car loan—with a car lease, you only pay a percentage of that. The car’s residual value is what the vehicle is expected to be worth at the end of the lease. The residual value is taken from the purchase price and the difference is what you make payments on. So if the car’s residual value is 55 percent after three years, for example, that means the $40,000 car would be valued at $22,000 at the end of the lease. The lease payments would be calculated based on the remaining $18,000 and not the full $40,000, along with interest, taxes and fees.

Leasing may also be a better option if you don’t have very much cash saved for a down payment. Usually a leaser requires a “drive off” o...

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...ary constraints. In order to get the payments lowered without having to come up with more money down, some lenders stretch the loan out to a longer term. Auto loans can last up to five or six years! Also, the longer the loan term, the more interest that ends up being paid in the end. Worst case scenario, when the car is finally all yours and the lender is paid in full, you’ve paid a ton of interest, have a seven year old used car with over 100k miles, and quite possibly repair bills.

When making the decision to purchase or lease a new vehicle, it’s important to weigh out all the pros and cons of every possible option: budget, driving needs, lifestyle and always most importantly, your credit history. Leasing may not fit everyone’s driving needs, but more people may opt for that choice if they knew how much they could save and or benefit from the alternative route.