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 stymied by the question of whether to lease or buy. Here are tips…
The most straightforward way of obtaining a car – you either pay cash or take out a loan to cover the cost. But that doesn’t mean the benefits will outweigh the drawbacks for your particular situation.
- Benefits: The greatest benefit of buying a car is you will actually own it one day, which also means you’ll be free of car payments until you decide to buy another one. The car is yours to sell at any time, and you are not locked into any type of fixed ownership period.
- 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.
Presumably, as you pay down your car loan, you have the ability to build equity in the vehicle. Unfortunately, this is not always the case. When you purchase a car, your payments reflect the whole cost of the car, usually amortized over a four-to-six-year period. Depreciation can take a nasty toll on the value of your car, especially in the first couple of years. As a result, buyers with down payments can end up financing a considerable portion of the car and even find themselves in an “upside-down situation,” in which the car comes to be worth less than what the buyer stills owes on it at a given time.
Like the monthly payments of a mortgage, monthly car payments are divided between paying principal and interest, and the amounts dedicated to each vary from payment to payment. In the first years of your car loan, the majority of each payment goes towards interest rather than the principal. During this time, most new vehicles also depreciate 20 to 40 per cent. The loss in equity is a double whammy – your car depreciates dramatically, and because the monthly payments you’ve been making have mostly gone towards interest rather than the principal, you are left with very little equity in the car.
For those who have never leased a car, the process can seem confusing and geared more towards business owners who might deduct the expense, or individuals who simply can’t afford car payments. But in reality, there are benefits to leasing a car regardless of your career or income status.
- Benefits: Leasing generally offers lower payments over a shorter time than financing; Leasing requires you to pay for only a portion of the vehicle’s value; Sales taxes are applicable to your ongoing payments, you don’t need to pay all taxes upfront. Compared to financing, leasing frees up more of your money and keeps more of it in your wallet.
- Ability to make changes: Your taste and needs may change and a short-term lease can make it easier to drive a new vehicle more frequently.
- You can get more car for your payment: Leasing is often a more affordable way to enjoy new technologies, safety features, accessories and have fewer maintenance costs.
- Payments: Flexible lease terms are available, including monthly, semi-monthly or bi-weekly. Plus, there is no obligation to purchase at the end of the lease and sometimes you can benefit from exclusive loyalty offers.
- Peace of Mind: Some dealerships offer Guaranteed Asset Protection (GAP) coverage. In the event your vehicle is stolen or deemed a total loss, GAP covers the difference between the remaining amount on the lease and the amount your vehicle insurance pays.
By: Tony Nhan – Sales Manager at Ready Honda
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