Lease vs Purchase:
You’ve decided it’s time for a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what’s best for you based on the operating cost, equity and ownership, and tax and insurance considerations.
BUYING WITH CASH
If you pay for the entire cost of your car with cash up front, it’s all yours and you don’t owe anything on it. However, you won’t have that money available for investing, for other uses or in case of an emergency.
TAKING OUT A LOAN
When you finance your car with a loan, you are gradually building equity as you pay it off. However, you should consider the amount of money that you will have to spend over the total period of the loan in order to build equity. Even though you will “own” the car after making all the loan payments, the value of the car will be worth much less than the amount that was spent in order to obtain it. And even though an asset, it is a continually depreciating one, losing more and more of its value with each passing day.
CLOSED END LEASE
In a closed-end lease, you make a predetermined number of lease payments for a specified period of time and return the vehicle at the end of the term. Barring physical damage to the vehicle, excess wear and tear, or additional mileage beyond the mileage allocations in the lease, you have no contingent responsibility for the vehicle’s value at the close of the lease. With a closed-end lease, any loss of value through depreciation of the vehicle is the responsibility of the leasing company.
OPEN END LEASE (Only available for businesses)
In this type of lease, you take the “risk” that, at the end of the lease term, the vehicle will have a market value comparable to the amount specified in the lease contract, sometimes called an “estimated residual value.” If the amount received from the sale of the vehicle is equal to the estimated residual value, you owe nothing. If it isn’t, you may owe all or a portion of the difference, often called an “end-of-the lease payment.”