Car Loan vs Lease
There is always a question about which is the better way to go when considering a new care. The question of car loan vs. lease has a definite and clear answer. It depends.
The truth is that when you consider a car loan vs. a car lease, the right approach is going to be highly personal and depend very much on your finances and your own priorities. One thing to understand is that they are both methods of putting you behind the wheel of a new car, but that is about all they have in common. It is important to understand exactly how each works if you are going to make an informed decision.
A car loan is used to purchase the car. You are buying the whole thing and when the loan is paid off, you own the car. Every new car has a depreciation value. This is the amount that the value of the car decreases over a given period of time. You are going to lose this money, one way or the other. When you have paid off the loan and own the car, it will not be worth the same as when it was new. For example, you buy a $20,000 dollar car and pay off the loan in three years. The car is now worth $13,000. You have lost the $7000 of depreciation value. In addition to this you will have paid interest on the loan.
When you lease a car, you are only going to pay for the time you use the car. In the above example, it would be the $7000 of depreciation value that you pay for plus some additional interest and fees. It would seem at first glance that the amount paid is equal. When the car is turned in after the end of the lease, you do not have a $13,000 car that you own, but on the other hand, you avoided paying that $13,000 and had the use of it for the life of the lease.
One way to put this idea is that in the short term, the lease might be better. Since you are only paying for $7000 over three years, the monthly payments are going to be lower. The monthly loan payments are higher because you are paying for the $13,000 that the car will be worth when paid off, so although you do not actually “lose” this money, your short term car payment is higher. In the medium term, of course, they are equal. The lease and the loan actually cost the same. In the long term, the loan is a better idea. The owner of the car can not choose to either trade it in or drive it for a few more years with no car payment at all. The owner of the turned in leased car needs to lease or buy another.
So, in the end, it is a personal decision. Many people want that payment free period and want to have an ownership arrangement. Other people are content with the lower payment and the idea that they will have a new car every couple of years. They are not so concerned with the accrued value of the car because they feel there are more profitable investments. Or they have more bills to pay. They are different ways to get to the same place which is behind the wheel of that new car. Which way you go is up to you.