Rebuilding Tips: Loan vs. Lease

　

Loan vs. Lease Here's a quick guide to the key differences of using a loan to purchase a vehicle versus leasing it.

Terms

Lease:

Lease terms are usually between 2 to 4 years. Loan: Loan contracts are usually signed for 4 to 6 years.

Type of vehicle

Lease:

The shorter term and lower monthly payment of a lease agreement allow you to drive a new and more expensive vehicle every 2 to 4 years. Loan: Higher monthly payments make driving a new or expensive vehicle every 2 to 4 years unpractical.

Ownership

Lease:

Unless you decide to purchase, you must return the vehicle at the end of the lease. Loan: You own the vehicle.

Up-front costs

Lease:

Up-front costs include a monthly payment, security deposit, down payment, taxes and registration fees. If you take into consideration the total cost of the vehicle and the monthly payment you want, the sum is usually less than the up-front costs of purchasing. Loan: Up-front costs include down payment, taxes, registration fees, and other charges. This amount is usually larger when compared to lease, especially if you want an expensive vehicle with low to moderate monthly payments.

Monthly payments

Lease:

Monthly payments are calculated based on the vehicle's depreciation during the lease term, rent charges, taxes, and other fees. Lease payments are usually lower than loan payments. Loan: Monthly loan payments are based on the total amount of purchase price, plus interest charges, taxes and other fees.

Insurance

Lease:

The insurance premium is usually higher. Loan: The insurance premium is usually lower.

Early termination

Lease:

You are responsible for early termination charges, as stipulated in the lease contract. Loan: You are responsible for paying off the loan.

Vehicle return

Lease:

You need to return the vehicle at the end of the lease. There may be some end-of-lease charges. Loan: You keep the car.

Future value

Lease:

The lessor bears the risk of the vehicle's future market value. Loan: If you decide to sell or trade-in the vehicle at the end of the loan term, the risk is yours.

Maintenance

Lease:

You are responsible for the maintenance of the vehicle during the lease term. Loan: You are responsible for the maintenance of the vehicle.

Mileage

Lease:

Most leases impose a vehicle mileage limit. There will be extra charges if actual mileage exceeds the contract limit when you return the vehicle. Loan: No limit.

Excess wear

Lease:

You might need to pay extra charges when you return the vehicle if the lessor determines that vehicle wear and tear is over the contract limit. Loan: No limit. Like mileage, however, more wear and tear equals lower resale or trade-in value for your vehicle.

End of term Lease: At the end of lease, you can return the vehicle and walk away, lease another vehicle or purchase it for the residual value. Loan: The vehicle is yours.



For more financial education visit www.rebuildingyourfuture.com