Loan-vs-Leasing
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Loan Lease Terms Loan contracts are usually signed for 4 to 6 years. Lease terms are usually between 2 to 4 years. Type of vehicle Higher monthly payments make driving a new or expensive vehicle every 2 to 4 years unpractical. 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. Ownership You own the vehicle. Unless you decide to purchase, you must return the vehicle at the end of the lease. Up-front costs 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. 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. Monthly payments Monthly loan payments are based on the total amount of purchase price, plus interest charges, taxes and other fees. 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. Insurance The insurance premium is usually lower. The insurance premium is usually higher. Early termination You are responsible for paying off the loan. You are responsible for early termination charges, as stipulated in the lease contract. Vehicle return You keep the car. You need to return the vehicle at the end of the lease. There may be some end-of-lease charges. Future value If you decide to sell or trade-in the vehicle at the end of the loan term, the risk is yours. The lessor bears the risk of the vehicle's future market value. Maintenance You are responsible for the maintenance of the vehicle. You are responsible for the maintenance of the vehicle during the lease term. Mileage No limit. Most leases impose a vehicle mileage limit. There will be extra charges if actual mileage exceeds the contract limit when you return the vehicle. Excess wear No limit. Like mileage, however, more wear and tear equals lower resale or trade-in value for your vehicle. 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. End of term The vehicle is yours. At the end of lease, you can return the vehicle and walk away, lease another vehicle or purchase it for the residual value.
How an auto loan works
When you purchase a vehicle with a loan, a bank or other financial
institution pays for most or all of the vehicle up-front, and you agree to
pay back the money over time. The amount of money you borrow from the bank
is referred to as the "principal." The amount of money you contribute
up-front is referred to as the "down payment" and usually varies from 10% to
20% of the purchase price of the vehicle. You can often purchase a new car
without a down payment (if you qualify); used vehicles generally require a
20% or more down payment.
The payback period for a loan is typically up to five years, although some
newer vehicles are being sold with longer-term loans. The financial
institution will charge you "interest" for your use of their money. Interest
rates vary depending on a number of factors such as your credit rating and
where you live. Currently, new car loan rates start at around 8.5%, with
used car rates about a percentage point higher. Manufacturers frequently
offer lower loan rates as a purchasing incentive, but sometimes these are
attached to conditions that may not work for you. Make sure you ask enough
questions to make yourself comfortable when investigating various loan
options.
Key features of loans
The primary features of loans are summarized below. Make sure you review our
articles on leases and the differences between loans and leases before
making a final decision.
- You have ownership and equity in the vehicle. Your monthly payments are working to purchase that car and it's yours to sell or keep as long as you wish.
- Gives you control over your vehicle. You can modify the vehicle, add special features or alter it.
- Monthly payments are generally higher than with a lease.
- Usually involves a down payment, either a trade-in or cash.
- Maintenance is up to you. Always maintain your factory warranty and service your cars, but you're not on a strict schedule, with penalties as with a lease.
- No mileage limits.
- At the completion of the finance period, there should be no balloon payment.
- Because a typical manufacturer's warranty is shorter than your financing term, your maintenance costs may run higher than with a typical short-term lease.