Leasing a Car Vs Buying a Car
To lease or to buy is a dilemma faced by almost every potential car owner. Both the options seem lucrative in their own regard. However, when you think from the finance prospective, you need more understanding of the two terms, leasing a car and buying a car. When you compare the financial and tax benefits of leasing vs buying a car, you come to a conclusion that the decision has to be made very consciously as both have their own advantages and disadvantages.
Leasing a Car Vs Buying a Car
Leasing is a concept in which a lessor leases a commodity or realty to a lessee. The term 'lease' refers to the contract which permits the lessee to use the commodity or realty for a predetermined time period at a previously agreed cost. Car leasing is similar to car rental but with a little difference. Car leasing means you rent a car from the lessor for a particular time period and a fixed monthly payment. However, leasing involves a lot more technicalities than renting. The lease contract specifies the amount to be paid as down payment, time for which the car is leased and the miles that can be driven during the lease period. The clauses of the contract are drafted only after the lessor and lessee come to consensus regarding the down payment amount and monthly payment. This amount is found out by subtracting the resale value of the car after the prescribed time period, from its current price. The difference in amount is the lease amount which is to be paid by the lessee. Following example should give you a better understanding of the whole concept.
If a car costs $40,000 today and its resale value plummets to $30,000 in the next three years, then the lessee has to pay $10,000 as the lease amount during these three years.
After the lease period is over, the lessee can lease a new car if he wishes. The concept of car buying is pretty simple. You borrow money from a lender or loan institution and buy a car in full. You make monthly installments and accordingly go on gaining equity of your car. At one point, the car becomes entirely yours. In a nutshell, leasing a car means using a car for a fixed time period whereas as buying a car means gaining complete ownership of the car for lifetime.
Pros and Cons of Leasing and Buying a Car
When you compare owning vs leasing a car, both involve certain pitfalls. Buying a car is obviously an expensive affair. You need to pledge a hefty security for your loan to get approved. Besides, the car value depreciates at alarming rate. Thus, when you decide to resale it, you end up with much less money than you actually invested in it. On the bright side, it's your car and you can do anything with it. You can customize it, drive as many miles as you want it, resale it or simply give it away in scrap when you are done with it.
On the other hand, when you decide to lease a car, you end up paying far less money than you would for a new car. Other advantages of leasing a car include, driving newer models of fancy cars, which may not be affordable to you otherwise. You are relieved of the hassles of finding a new owner for your car and estimating its depreciated cost. However, on the flip side, you are abided by the lease contract which only permits you to drive fixed miles for a fixed time period. If you drive more than that, you will be charged an extra amount for it. Similarly, if you do not maintain the vehicle in good condition, you will have to shell out extra money as penalty. Also, if you decide to terminate the contract you will be required to pay certain fees as penalty. This amount may be equal to the impending amount of your contract.
Thus, one should take into account his requirements and assess his financial position before making this crucial decision.
