Leasing a Car
Leasing a car is very similar to renting a car; you can consider it as a long-term rental. When you lease a vehicle you only pay a fraction of the vehicle’s cost during the lease term. This is known as the Depreciation Value, the value of the car that constantly diminishes while you are driving it. The Depreciation Value is what makes monthly lease payments so much cheaper than purchase payments. When leasing a car you have the option of not paying a down payment; in this case you only pay sales tax on your monthly expense (in most states) and a financial rate (or money factor), which is similar to the interest you pay on a loan.
You are required to have a higher credit rating in leasing than in buying which also allows you to take advantage of the special deals offered by most manufacturers.
Most leases give you the option of leasing the car for two to five years. The three-year option; however, is most preferred primarily because of the three year bumper-to-bumper warranty offered by many carmakers. This warranty is so beneficial because you accrue almost no repair cost during your entire lease term. Bear in mind, the foremost purpose of leasing a car is to drive a brand new or nearly new car on a constant basis. So why deal with the hassle of extended warranties and higher maintenance costs that longer leases impose? Besides, if paying for these matters do not bother you, you should probably consider purchasing the car outright. At the end of the lease term you can either return the car to the dealership, or purchase it for its depreciated resale value. (This is know as a closed end lease agrrement)
Leasing allows one to drive a brand new car, make lower monthly payments and receive certain occupational tax breaks, but, it is often less favored than purchasing because if you decide not to trade the car in or return it to the dealer you still have a lingering balance.
Purchasing a Vehicle
Purchasing a vehicle is a simple at it sounds; you pay for the entire cost of the vehicle regardless of how many miles you accumulate.
Purchasing gives you two options: you can either write a check for the entire value of the car, or pay a down payment and finance the remaining balance for up to 84months. When purchasing a car you will still need to have a high credit rating; however, not as high as what is required with the lease option. If you finance the balance of a car, in most cases a financial institution will offer you a loan plan with a monthly interest rate. Monthly payments are generally higher than leases for the first five years, but you do end up owning the vehicle at the end of the term.
This is why many people favor buying over leasing.