||Leases are primarily attractive because payments tend to be LOWER - they are based on an estimated depreciation over the period of the lease, rather than the principle value of the vehicle.
||Payments tend to be HIGHER because you are paying towards the total cost of the vehicle.
| You are actually paying for USE of the vehicle for a set term - typically 3 years. At the end of the lease, the vehicle must be returned to the dealer. On the upside, there's no worry about owning a depreciated vehicle.
||Once the loan is paid off, you OWN the vehicle to keep as long as you wish.
|Leased vehicles must remain exactly the same. There are also caps placed on annual mileage - typically 12,000 or 15,000 mi/yr. Additional driving miles incur additional cost. Additionally, while there are some options available for early termination of a lease, those who lease are more firmly committed to keeping the vehicle for the entire term of the contract.
||When purchasing a vehicle, the owner is able to personalize any aspect of the car and drive as many miles as they wish with no financial penalty. Owners also have the freedom to trade-in for a different model or sell at anytime.
||Since leases typically run for three years, little to no maintenance is required beyond routine measures such as oil changes. Those with a lease will have the comfort of a warranty for the entire three years.
||Since it's a purchase rather than a lease, the factory warranty will likely expire during ownership. It is advisable to purchase an extended service warranty to help assist with unpredictable repair costs.
That's the snapshot - below, you'll find more information on loans, leases, and the comparative advantages.
What is a loan? How do loans work?
A loan is a specific amount of money that you borrow from a lending institution in order to purchase a vehicle. You then make a commitment to make monthly payments for a specific period of time (called a "term") until the full amount borrowed is repaid.
The amount that you borrow and the remaining balance during the life of the loan are referred to as the principal. The principal can be paid off at any time prior to maturity, but as long as it is outstanding the lending institution can charge a prearranged interest rate that is included in your monthly payment. Until the principal is paid in full, the lending institution retains the title to the vehicle as security on the loan. When the principal is paid, the title is returned to you, and the vehicle is yours.
When you obtain a loan, your down payment and monthly payment go to the total purchase price. When the term of the loan is complete and the loan is paid in full, you own the vehicle. A lease is similar to a balloon finance agreement where you pay interest on the entire purchase price of the vehicle but you are only paying a portion of the principal balance. At the end of the term of the lease you may return the vehicle, buy the vehicle, sell the vehicle or trade in the vehicle.
What is a lease? How does leasing work?
A lease is exactly like a balloon finance contract where you pay interest on the entire amount borrowed but pay down only a portion of the amount borrowed (the principal). As a result you will have lower monthly payments or, put another way, you can drive a better car for less money.
The differences between a lease and a balloon finance contract are: 1) with a lease, title is held in the name of the funding source 2) the “balloon” or in lease language the “residual value” is established by the funding source based upon the anticipated depreciation of that particular vehicle over the term of the lease, assuming a certain number of miles to be driven and reasonable wear and tear and 3) unlike a balloon finance where you are responsible to pay off the balloon amount at the end of the term, in a lease the funding institution assumes the responsibility for the amount of principal not paid. Typically, they will recover that amount by reselling the vehicle at auction.
How do I choose between a loan or a lease?
Pre-owned vehicles, other than manufacturer's certified pre-owned, are better financed than leased.
For new vehicles, the key question is how long you want to keep the vehicle. If you want to keep it six years or longer, then financing will likely make more economic sense. Another consideration is whether you'd like to customize your vehicle, or whether you anticipate putting heavy mileage on the vehicle. Owning is more suited to both of these situations.
For those who prefer to upgrade vehicles every few years, leasing often makes greater financial sense.
What if I drive a lot of miles, should I still lease?
Perhaps one of the greatest myths about leasing is that it doesn't make financial sense to lease if you drive a lot of miles. The reality is that you pay for miles regardless of whether you lease or finance or purchase outright and you pay for miles in the same way, i.e. the depreciation of the vehicle.
The real cost of a vehicle when purchased or financed is what you pay for it up front plus its operating cost over time less what you sell it or trade it for at the end. Many times, the cost per mile is less if you lease than the cost impact on the trade or resale value on a finance or outright purchase.
There are other considerations as well. People who do a lot of miles need to get into new vehicles sooner. A lease will allow them to do just that. What is going to be the cost of service and repairs on a high mile purchased vehicle? How much lower will your payment be on a lease versus a finance contract? If your vehicle gets into an accident on a purchased or finance vehicle it will result in increased depreciation even if you have it repaired properly. This is not true when you lease. There is no additional cost impact. Many times high mileage drivers have “business use” of the vehicle as defined by the IRS. If you have “business use” you should be able to reduce your taxable income by a much higher percentage of your actual out of pocket expense if you lease than if you finance or purchase outright.
If you are a high mileage driver, have one of our Sales Consultants do a financial comparison for you. We think you'll be surprised.
Understanding special leasing terminology:
As leasing is technically different than buying or financing, different terminology is used to describe the transaction. The most important concepts are capitalized cost, residual value, and money factor.
Capitalized Cost - This is the price you paid for the vehicle plus an acquisition fee charged by the funding institution less and money or trade equity put down hence capitalized cost reduction.
Residual Value - This is the amount that the funding source believes that the vehicle will be worth at the end of the term based upon the year, make, model of the vehicle, reasonable wear and tear and a certain number of miles driven.
Money Factor - The money factor is simply another way of calculating interest. It is arrived at by taking the average amount borrowed during the term of the lease and converting the annual percentage rate into a monthly percentage rate expressed as a decimal. To determine the actual rate of interest you are paying on a lease multiply the money factor by 2400.