It’s time. You just can’t take it anymore. It seems that once you have one thing on your car repaired, another thing goes wrong. Perhaps it’s time for a new car.
You have decided you want a new car, so you don’t have to revisit the repair shop anytime soon. Not that Mike the Mechanic is a bad guy, but enough is enough!
You start shopping, and you’re instantly hit with a choice – should you lease or buy a car with an auto loan? It can be a confusing decision. Here are some questions you should answer before deciding.
Why should you consider financing your car with a loan?
For many, the car loan is the standard financing tool when it’s time to get a new ride. The car loan will give you a set monthly payment over a specific term and will allow you to drive as many miles as you want as long as want. When you have paid off your loan in full, the car is yours to keep and continue driving.
Why should you consider a lease?
With a lease, you’ll drive your car for a predetermined period and pay for the term you will be driving the car rather than the full price. Your monthly payment will be lower than the payment for a car loan and usually spread out over two to four years.
Sounds great, right? So why wouldn’t you want a lease?
While the payments may be lower on a lease than you would have with a car loan, a lease comes with restrictions you don’t have with a loan. The lease will limit you to a certain number of miles you can drive each year without having to pay “excess mileage” charges when the term of the lease is over. You may also be assessed excess wear and tear charges if your vehicle isn’t in good condition when you turn it in.
And, oh yeah, you will have to turn in the vehicle or arrange to buy out your lease when your term is up. You could end up always having a loan payment. If you’re looking ahead to a day when you may not have to have a monthly car payment, the lease is probably not for you.
Here are some things to consider when making a choice.
Is a down payment required?
Loans and leases may both require a down payment.
You can get both without a down payment in certain circumstances. Make sure you know how much you will have to come up with out-of-pocket when evaluating your alternatives. Keep in mind; with a lease, that down payment will never come back to you. With a loan, the amount you put down at the beginning is still yours when you pay off the loan in the value of the vehicle.
Think twice before making that lease down payment.
How much will it deplete your savings available for an emergency? Spread the down payment across the number of monthly payments to see how much your “real” monthly payments would be. Is it worth using your funds this way for something you will not own?
Can you live with the mileage allowance?
The lower that lease payment is, the fewer miles you will be able to drive. Low payment leases usually allow 10,000 or 12,000 miles per year without incurring excess mileage penalties, which typically range from $0.15 to $0.30 per mile if you go over the limit. If you’re over just a little, it’s not much of a problem. Miss your mark by a couple of thousand miles, and that can be a large amount to have to pay at the end of the term.
Take the time to evaluate any potential life changes that could happen during the term of your lease that would cause you to rack up significantly more miles than you do now.
- Could you get a new job or be transferred to a location much further from your home?
- Is it possible you will be moving in the near future? Moving into a new home can drastically change the miles you will put on your car.
- Something as simple as a new relationship can affect the miles you drive. Could you suddenly be driving many more miles to spend time with a new love interest?
We can’t see into the future, but it makes sense to think through these possibilities.
Take a second look at financing with a car loan.
With a car loan, you maintain the flexibility to sell the vehicle and pay off the loan at any time. This flexibility is important if your life situation changes.
You also build ownership in your vehicle as you make payments. At the end of the term, you have an asset that is worth something. You may be able to continue driving the same car for years to come without a monthly payment.
Make sure you know and understand your options before leaping into auto financing.
A lease may be right for you. A loan may be a better option. Take the time to compare and make the smart choice.
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