Question

The following article does a good job of breaking down the advantages/disadvantages of leasing vs. purchasing...

The following article does a good job of breaking down the advantages/disadvantages of leasing vs. purchasing vehicles: Title: Pros and Cons of Leasing vs. Buying a Vehicle Source: http://www.investopedia.com/articles/pf/05/042105.asp Buying a car can be overwhelming. In fact, the pleasure of getting a new car can be quickly clouded during the financing decision-making process and price negotiations. Besides price haggling, many car shoppers are plagued with the decision to leaseor buy. Which financing decision is right and why? This article will focus on rationalizing that choice. Trends As new cars become more and more expensive, more buyers will likely be forced to lease. In fact, some auto experts predict that within twenty years, everyone will be leasing their cars. A car payment may become a fixed budgetary expense, much like your mortgageor utility bill. For those of us who have never leased a car, this statement may be disturbing. Leases seem confusing, complicated and geared more toward business owners (who might deduct the expense) or individuals who simply can't afford car payments. But these perceptions may be outdated. Before eliminating leasing as a financing option, car-buyers need a solid understanding of the different purchasing processes. Buying: The Benefits By far the greatest benefit of buying a car is that you may actually own it one day. Implied in this benefit is that you'll one day be free of car payments. The car is yours to sell at any time and you are not locked into any type of fixed ownership period. When you buy a car, the insurance limits on your policy are typically lower than if you leased. Finally, by owning a car, you're free to rack up the mileage without economic penalties or restrictions. Buying: The Drawbacks The most obvious downside of owning versus leasing is the monthly payment, which is usually higher on a purchased car. Additionally, the dealers usually require a reasonable down payment, so the initial out-of-pocket cost is higher when buying a car. Presumably, as you pay down your car loan, you have the ability to build equityin the vehicle. Unfortunately, however, this is not always the case. When you purchase a car, your payments reflect the whole cost of the car, usually amortizedover a four- to six-year period. But, depreciationcan take a nasty toll on the value of your car, especially in the first couple years you own the vehicle. More and more, as car prices escalate, buyers who give modest down payments end up financing a considerable portion of the car, and then find themselves in an "upside-down situation" where the car is worth less than what the buyer pays to own it. Like the monthly payments of a mortgage, monthly car payments are divided between paying principaland interest, and the amounts dedicated to each vary from payment to payment. In the first years in which you pay back your car loan, the majority of each payment goes towards interest rather than principal. But in the first couple years after being purchased, most new vehicles depreciate 20-40%. The loss in equity is a double whammy: your car depreciates dramatically, and the monthly payments you've been making have mostly gone towards interest rather than the principal, which leaves you very little equity in the car. Leasing: The Benefits Perhaps the greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Leases require little or no down payment and there are no up-front sales-tax payments. Additionally, monthly payments are usually lower, and you get the pleasure of owning a new car every few years. With a lease, you are essentially renting the car for a fixed number of months (typically 36-48 months). Therefore, you pay only for the use (depreciation) of the car for that period, and you are not forced to absorb the full depreciation cost of the vehicle. Leasing a car will never put you in an upside-down position. Leasing also provides an alternative when buying a car is not an option. Most banks will not lend more than $30,000 for a car loan. If you are planning to acquire a car worth more than that, leasing may be your only option. Finally, for business owners, leasing a car may offer tax advantages if the vehicle is used for business purposes. Leasing: The Drawbacks By leasing a car, you always have a car payment, and if you don't like that prospect, then leasing is probably not right for you. As long as you lease, you never really own it. However, depending on your type of lease, when your lease term is up, you either hand the keys over to the car dealership and look for another vehicle, or finance the remaining value of the vehicle and go from making lease payments to loan payments. The mileage restrictions of leasing pose another drawback. If you drive a great deal during the year, consider instead a loan or an open-end lease (which we discuss below). Most leases restrict your mileage usage to 15,000 miles per year (sometimes even lower at 12,000 per year). If you go over your allotted miles, you pay extra: the going rate is about 15 cents for every mile over your limit, and 20-25 cents for luxury cars. So, if you go over, say, 4,000 miles on your luxury sedan, you can expect to pay about $800 at the end of the lease. Finally, insurers usually require higher coverage costs for leased vehicles. However, depending on your age, driving record and place of residence, that additional cost may be nominal. Car Leasing: Words of Caution A downside to leasing is that essentially you, instead of the owner/dealer, pays for the most expensive years of a vehicle's life. The amount for which you lease is the difference between the purchase price and the salvage, or residual, value, which is the predetermined value of the car at the end of the lease period. The amount of the salvage value that the dealer includes in your contract directly impacts your monthly payment. When leasing, it's important to consider a vehicle that best retains its value and rethink cars with a high depreciation rate. Devious dealers try to shift more of the depreciation cost onto you by embedding an unfairly low residual value. Also, when entering a lease agreement, be aware of any clauses in the contract regarding additional charges for "excess wear and tear" or above-average costs for additional mileage. You want to minimize any surprise costs as much as possible. Leasing Options There are two types of car leases: closed-endand open-end. Closed-end leases allow you to walk away from the car at the end of the lease term. If you owe for any mileage coverage or unusual wear and tear, this is when you'd have to pay for it. With an open-end lease (also known as an equity lease), you must purchase the car at the end of the lease period for a predetermined amount. This is often the type of lease used by individuals who have high mileage or by businesses. Most consumer groups suggest that the closed-end lease is the best option, because it poses less risk upon the expiration of the lease term. Conclusion The decision to lease or buy will always depend on your personal circumstances. If your objective is one day to be rid of pesky little car payments and you actually want to take ownership, buying a car may be the best option. If, however, your goal is to drive a new set of wheels every four years and/or minimize your monthly costs, leasing a car may be a good alternative. Educating yourself about the two financing options will give you the confidence you need when you step into a dealer's showroom.

Homework Answers

Answer #1

The article gives the advantages and disadvantages of buying a car and leasing a car. There is no perfect answer to the question about which is the best option for financing the purchase of a car. It depends from person to person and varies based on the financial ability as well as his/her comfort. If the person wants the ownership of the car to himself and no payment of money every month then buying the car is the right choice. But if the person wants to change cars very frequently and doesnot want any ownership. Then leasing is the best option. The decision to buy or to lease should be taken very carefully as both have their advantages and disadvantages.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
2a. Two different leasing options are listed below for a Jeep Wrangler (worth $27,995 new). How...
2a. Two different leasing options are listed below for a Jeep Wrangler (worth $27,995 new). How much more must be paid in monthly fees over the full 4 years to take option B (rather than option A)? What is that extra money getting you? Option A: Take out a 4-year lease. That is, drive the same car for 4 years paying a monthly fee of $247.28, then turn the car in. Option B: Take out two consecutive 2-year leases. That...
The Problem: Holly wants to explore the difference between buying and leasing a vehicle, both over...
The Problem: Holly wants to explore the difference between buying and leasing a vehicle, both over 5 years with monthly payments. The car that she has an interest in has a value of $27 000, and is located in Winkler, MB. If she purchases the vehicle, she can do so with 3% financing. If she leases the vehicle, there is a residual rate of 51%, an acquisition fee of $495 and an interest rate of 5% (no security deposit is...
You are thinking about leasing a car, and the dealer offers you the following deal: You...
You are thinking about leasing a car, and the dealer offers you the following deal: You can drive the $23,000 car off the lot today, with no upfront payment if you agree to make monthly payments of $375.22 for five years.   At the end of the lease, you can keep the car if you pay out a residual value price of $4,000.  What is the annual rate of interest embedded in this lease arrangement?
You are planning to acquire a new car with a negotiated purchase price of $50,000. You...
You are planning to acquire a new car with a negotiated purchase price of $50,000. You prefer to turn your cars over after 4 years. You have two financing choices: lease or borrow & buy. You can obtain a four-year loan at 6% annual rate (which means 0.5% monthly rate) for the entire purchase price of the car. A four-year lease (equal monthly lease payments start immediately) requires a down payment of $4,000. The market value of the car is...
: For a typical 36-month lease on a car valued at $30,000, the monthly charge is...
: For a typical 36-month lease on a car valued at $30,000, the monthly charge is about $600. At the end of the 36 months, the car is returned to the lease company. As an alternative, the same car could be bought with no down payment and 36 equal monthly payments, with a monthly interest rate of 1%. At the end of 36 months, the car would be fully paid for. The car would then be worth about half its...
You are planning to acquire a new car with a negotiated purchase price of $50,000. You...
You are planning to acquire a new car with a negotiated purchase price of $50,000. You prefer to turn your cars over after 4 years. You have two financing choices: lease or borrow & buy. You can obtain a four-year loan at 6% annual rate (which means 0.5% monthly rate) for the entire purchase price of the car. A four-year lease (equal monthly lease payments start immediately) requires a down payment of $4,000. The market value of the car is...
You are in the process of purchasing a new car that will cost you $25,000. The...
You are in the process of purchasing a new car that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price, so that the purchase price becomes $24,000) if you pay today or 3.9% APR financing for 4 months and no rebate (with payments made at the end of the month). You are in the process of purchasing a new car that will cost you $25,000. The dealership is offering you either...
You have saved $5,000 for a down payment on a new car. The largest monthly payment...
You have saved $5,000 for a down payment on a new car. The largest monthly payment you can afford is $400. The loan will have a 15% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months? Do not round intermediate calculations. Round your answers to the nearest cent.
PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car....
PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 8% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? Do not round intermediate calculations. Round your answer to the nearest cent. $   What is the most expensive car you can afford if you finance it for 60...
PV AND LOAN ELIGIBILITY You have saved $5,000 for a down payment on a new car....
PV AND LOAN ELIGIBILITY You have saved $5,000 for a down payment on a new car. The largest monthly payment you can afford is $400. The loan will have a 8% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? Do not round intermediate calculations. Round your answer to the nearest cent. What is the most expensive car you can afford if you finance it for 60 months?...