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Leasing vs. Buying

The decision about whether to lease or buy your new vehicle should be based on a number of different factors. Both options offer advantages that are worth considering. Your personal budget and financial limitations should not be your only consideration; you also need to determine what your long term goals are, and decide how you intend to use the vehicle as well.

Leasing Your Vehicle

Leasing a vehicle allows you the benefit of having a new vehicle every couple of years, and limits the risk of costly repairs. Typically, upfront costs and monthly payments are lower if you choose to lease instead of buy.

Leasing requires you to pay for only a portion of the cost of the vehicle you will be driving. You are not required to make a down payment, but will need to pay sales tax on your monthly payments. You will also pay a financial rate, called a money factor, which is very much like the interest rate on a standard auto-financing loan.

Some lenders require a security deposit to be paid before the vehicle is released. This protects them in the event that the vehicle is damaged, and provides them with some money should you stop paying your lease. When the term of the lease has ended, you can either return the vehicle, or elect to purchase it for its depreciated resale value.

Lease payments are divided into two parts: a finance charge and a depreciation charge. The finance portion of your lease payment is the interest on the amount of money tied up in the vehicle during the time you have possession of it. The depreciation charge covers the leasing company for the vehicle's value that is lost during your lease. Part of the finance cost is included in your monthly payments, and the remainder must be repaid when you return the vehicle at the end of the leasing term, or at the time you elect to purchase the vehicle.

One important factor to consider before leasing your vehicle is the amount of miles you expect to drive the car each year. Many lease agreements specify a set number of miles permitted for each year and for the entire length of the lease. If you should go over this limit, you may be charged penalties at the end of your term.

Buying Your Vehicle

If having something to show for your money at the end of your financing term is important, then buying might be the best option for you. Purchasing your vehicle allows you to have some ownership in it, and will enable you to eventually pay off your debt and own your vehicle outright.

Buying a vehicle requires you to pay for the entire cost of the vehicle, regardless of how long you intend to keep it, or how many miles you drive it. Generally, you will need to make a down payment, pay the sales tax upfront, and pay an interest rate that is determined by your lender.

Buying helps you build equity, and provides you with the option of selling your car or trading it in for a new one at some point in the future. Payments are typically higher when buying, but those payments go toward paying off the loan instead of simply toward your use of the vehicle. Owning your vehicle allows you to customize it, but also means you will be responsible for the cost of repairs once your warranty has expired.

Types of Charges

Like lease payments, auto loan payments are divided into two parts: a finance charge and a principal charge. The finance charge covers interest on your loan, and will vary depending on the interest rate you receive when you agree to your financing terms. The principal charge goes toward paying off the purchase price of the vehicle. Part of the principal charge can be considered a depreciation charge, similar to that paid on a lease, as the value of a vehicle becomes less over time. The remainder of the principal payment establishes equity, or the resale value of the vehicle. The longer you own the vehicle, and the more miles you put on it, the lower the resale value becomes.

Both buying and leasing offer many benefits, and both come with a number of disadvantages. Determining which option is the best choice for you will require a serious look at your priorities, lifestyle, and long term goals. Whatever choice you make, the Credit Union will be here to provide you with the best possible deal on your vehicle financing.

Next: The Best Time to Buy a Car

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