Introduction
How can we define Portuguese? “Legally, vehicle leasing is a lease contract in which the lessee commits to pay the creditor the renting amounts corresponding to the use of the vehicle – and the mandatory option to purchase it in the future if he so desires.” The vehicle becomes the property of the lessee after the receipt of all the installments in the lease when the option to purchase is mandatory, or through a mere formalization when the option to purchase is optional. To better understand the advantages of leasing and car financing, we will first look at the different situations and the advantages and disadvantages offered. Then we leave you with some indications that will help you make the best choice. Keep in mind the contractual provisions of the leasing company. They may vary from one company to another, particularly with regard to the contributions to be made available to companies, the maximum duration of loans, and the commitment or not of purchase.
It is not news that with the current economic structure, it is very difficult, if not impossible, for someone to acquire a car in cash. Given the alternatives available in the market, many people still have doubts when it comes to making the most appropriate choice. In a clarification note from the Portuguese Association of Financial Institutions (ASFAC), in terms of payment flexibility, leasing or renting is the ideal solution for those who need a car for a short period of time. But for a longer time, it is more advantageous to search for car financing, especially with the attractive spreads that exist in the market. Then again, should we lease (rent) or finance to buy the vehicle? What is the most appropriate technique? This week, Ei went to meet the four companies with which it is possible to carry out a leasing operation.
Understanding Car Leasing and Financing
No Residual Value – Although not a basic component of financing, this is a structural difference between leasing and financing. In a loan, you can choose to make an additional “residual” payment at the end of the loan and keep the vehicle with you. Such an action would not offer any savings or other benefits over the lease, and you would simply own the vehicle with the shared title.
Consistent Monthly Payments – When you finance a car, you agree on a monthly payment, such as $500 a month for a 5-year auto loan.
“Excess” Down Payment – Sometimes car buyers opt to make a higher down payment than necessary. This decision may be financially appealing, but it is best to keep this option in mind in case you need extra cash for important life events. The “excess” deposit essentially works as a loan to the lessee, and it is better to borrow extra cash from the dealer to fund the down payment and save more cash aside.
Same Down Payment and Taxes and Fees – Expect to pay a down payment for a finance transaction. A good rule of thumb is 20%.
Financing a car is the same as taking out a car loan. Here are the basic components of car financing:
Residual Value – In order to lease a car, you need to agree on a price that you are willing to pay to keep and own the vehicle when your lease term is up. This price is set at the beginning of your lease and does not change. If you make an offer at lease-end – for better or worse – the leasing company is legally obligated to accept it.
Regular Payments – These are the payments you make over the duration of your lease. If you have a 30-month lease, you can calculate this monthly payment using the formula: (Total Vehicle Cost – Down Payment) – Residual Value / 30 months.
Drive Off Charge – Think of this like a first month’s payment. In a 30-month lease, the payment would be 033% of the vehicle’s cost. For a $30,000 car, that amounts to $1,00
Taxes and Fees – As with buying a car, there are other charges that you need to pay as part of a standard lease. Registration, dealer fees, title, and taxes are part of this total lease cost.
Down Payment – If you lease a car, you will likely need to pay a deposit or down payment before you can use the car.
Car leases are similar to renting, but on a longer basis and with the option to buy the car in the end. Here are the basic components of car leasing:
Definition and Basics
Ensure you understand that vehicle leases have various mileage limitations which are specified in the lease agreement. Additional charges may occur for excess wear and tear and mileage. Some lease contracts may offer the option of purchasing the vehicle at the end of the lease contract period using a purchase option in the lease agreement. Assure that you understand the costs by obtaining and reviewing a purchase price disclosure before you decide to enter into a lease agreement. With so much money at stake, it is important to ensure that you are making the best financial decision when it comes to how you will pay for your car. So to help, here is a quick guide to choosing between leasing and financing.
Leasing is a financial payment option made to provide you with the ability to use the vehicle, not necessarily own the vehicle. Monthly payments on a lease are higher than payments on a finance contract to purchase the same vehicle. This means you may pay more money overall during a vehicle’s lease than during a vehicle’s finance contract through monthly payments. The principal portion of the monthly payments may be less during a vehicle’s lease than during a vehicle’s finance contract. This means you will build up less equity from monthly payments during a vehicle’s lease than during a vehicle’s finance contract.
Key Differences
This article outlines the key differences between financing and leasing an automobile. It provides a summary of some of the less controversial benefits resulting from the usage of the lease as an alternative form of auto financing. The article concludes by listing some of the factors (other than those mentioned) that may have a bearing on the lease decision that consumers should examine in depth.
When you lease an automobile, you are really paying rent for the use of it. Leasing is simply a different form of auto financing. It is a way to use a vehicle for a specific period of time without the large cash outlay associated with outright vehicle ownership. It is necessary to achieve a better understanding of these distinctions in order to sensibly decide whether to lease or not. Many consumers are beginning to take advantage of automobile leasing because of its varied benefits. However, leasing holds both benefits and limitations that vary depending on each consumer’s needs and financial situation. Anyone considering automobile leasing should carefully weigh the benefits and limitations specific to his/her requirements to determine whether lease payments or conventional purchase payments will best fit his/her overall financial and personal objectives.
Pros and Cons of Leasing
Low Monthly Payments When you finance a car, you pay the entire price of the vehicle. Whereas when you lease a car, you only pay for the cost of the vehicle’s depreciation during a lesser period (typically 36 months). Generally, the shorter the term, the less you’ll pay monthly. Keep your payments low if you want to get the luxury vehicle you were dreaming of. Even more, low payments mean that you can afford a more lavishly equipped car than if you finance it. Would you like air conditioning, leather seats, ABS, and monthly payments of only $249 for a new vehicle? Then browse the leasing ads. You may be surprised how affordable it really can be.
Whether you’re trying to score a great luxury car for a discount price or just want to keep your car payment as low as possible, a car lease can make a dent in your new vehicle’s initial cost. A car lease is simply an automotive loan that allows you to drive an extra-expensive car that you might not be able to afford otherwise, but it also has its downsides. Leasing a car is the most expensive way to operate a car, but there are advantages to consider too.
Advantages of Leasing
The major tax advantage involves the ability to deduct all of the lease payment or, more appropriately, the “lease charge” as a deductible business expense. There are two technical limitations placed on this deduction. First of all, you must use the vehicle in a trade or business or as part of the production of income. The use must also be “legitimate.” In other words, meals are deductible if they are served to potential business customers and the taxpayer does not eat lobster and steak three times a day. The tax law places no limits on the amount of income you can have and does not impose any unreasonable test to determine the percentage of business use.
Utilizing leasing over traditional “installment credit” financing may have two major advantages. Leasing an automobile provides distinct income tax advantages that are generally not available in a regular financing transaction. Second, leasing may enable you to acquire a more expensive car for a given monthly payment. The latter advantage may not be quite as important to you if you prefer a paid-for automobile over time.
Disadvantages of Leasing
Since car leasing typically allows for fewer miles driven than the average buyer of a new car drives, there could be considerable end-of-lease charges, such as 10 to 30 cents per mile for overages. In simple terms, the lessee will need to take into consideration paying for the privilege of using the leased car upon returning it. Cost of leasing is the highest among all options – cash pay, finance, and lease. Average lease payments are higher than average finance payments or the cash monthly outlay. In addition, the buyer’s financial loss accrues from the maintenance costs incurred during a lease term. These costs are included in the finance rate for that portion of the car payment made by the owner but paid directly by the lessee. The VLF charges, as opposed to sales taxes, are often difficult for the layman to calculate. The main reason is that the acquisition fee is not a monthly expense, as are the sales taxes, but the VLFs are due at the time of purchase, either at the beginning of the lease or at its conclusion if the car is purchased.
Pros and Cons of Financing
When you finance a vehicle, each monthly payment is broken down into four pieces. First, we need to address the money we’re borrowing in order to purchase the car because we begin to pay interest on this balance the very next day. When you finance a car, you pay interest in advance. Secondly, there’s the monthly interest charge. The third piece is a reduction of the outstanding balance. The last piece is a small charge, which is also interest, and is commonly referred to as a work charge. These charges are added to the balance of the loan in large part, and the purchase price goes up. There are three important factors to consider when running the numbers to see just how much an auto dealer or bank will charge for the loan. First, the money factor or the periodic rate. This is the cost of interest. If you put down $2700 on a $27,891 loan for 48 months at an APR of 68%, you find the monthly periodic rate of interest is 3067% and the monthly interest charges are $86Second, check to see how the lender calculates the amount of the credit taken off the balance. The balance you’re paying interest on is always less than your contract balance because interest is paid up front and the balance is paid off slower in the beginning and faster as it comes to the end. Be sure to compare and separate interest from the amount of your payment that reduces the credit off your balance. Third, if you’re positive that you’re going to prepay the loan, make certain your bank or dealer correctly applies prepayments to the balance and against future payments. With simple interest car loans, prepayments would not only remove the amount of money due but would include interest. Most of the prepayment would go against your last installment payment when the balance of the loan is close to the remaining interest. With pre-computed interest, monthly payments do not reduce because you pay the discount rate calculated for the entire term. If you prepay, the pay-off amount is calculated at the time of full prepayment, and not when the bank or dealer receives a prepayment payment. Before taking this into consideration, don’t forget to ask your lender if prepayments lower the original term of the loan.
When you decide to finance the purchase of a car, two distinct types of ownership are available to choose from. The first is direct ownership. When you own the car, ownership rights are represented in the certificate of title, and you take possession of the car after purchase. It’s your property and you can use it as you wish. The second type of ownership is called installment purchase ownership. There is an installment sales agreement and it’s the dealer who either sells you the car or provides a loan, which retains the certificate of title. After the final or balloon payment, the certificate of title is yours. The dealer does not have the right to repossess the vehicle during extended delinquency or bankruptcy. You have the same rights as under buy-as-you-go, which means normal wear and tear and $500 damage up to six months post-prepayment.
Advantages of Financing
When the car is paid off, you can use the money that was allocated for the monthly payment to make an early payment for the mortgage or for retirement investment. Car financing is the right choice for you if you prefer having a car for a long time.
If you purchase a car with a protected resale value or simply decide to lease another car later on for another reason, the new car payment will be low. And once again, you can eliminate the car payment by keeping the car until your next purchase. The value of the car that you own is added to your overall wealth because it contributes to your net worth. If the car is in perfect condition after your loan is paid off, you can lease the car to make some money. You can even promote lease swappers and take over someone else’s lease to reduce the car payment. Keep in mind that this practice is applicable only in some states, and you have to make sure the leasing company agrees to it.
After you have paid off the car, you now own it. At that point, the car payment is eliminated, and so the cost of having a car is reduced. You also have the flexibility to sell your car later on rather than waiting for a lease to end. You can also help out a family member or a friend by giving the car to them. If the car is no longer of financial help or of use to you, you can exchange it for money. You can add some of the money to help you with the purchase of a new car.
Start the process with a loan pre-approval. You will have to pay for the car in full either through your resources, a loan, or a combination of both. You may have to pay extra fees or a down payment if you choose to finance through the dealer. Also, some lenders may require a large down payment. But doing so will be beneficial in the end because it means lower monthly payments. Normally, financing a car requires higher monthly payments.
Disadvantages of Financing
Interest expense is always a disadvantage of financing a vehicle, especially when buyers must pay a relatively higher interest rate. While the interest rate on an auto loan can vary from consumer to consumer, those buyers with better credit stand to receive the best loan terms and the lowest interest rates. High-mileage drivers could save money—potentially tens of thousands of dollars—by financing a new or, especially, a fuel-efficient vehicle for multiple years. Interest expense on a car loan is driven by three primary factors: loan amount, interest rate, and loan term. Buyers who are willing to pay off their loans in shorter periods of time, or who can make additional prepayments, can save significant interest expense, reduce their lifetime interest rates, and own their vehicles much sooner.
Even the most prepared buyers face a range of potential disadvantages when it comes to financing a vehicle. For instance, in some cases, buyers may have a more challenging time getting approved for a loan, while others may have to settle for paying significantly higher interest rates. Buyers also face the prospect of making higher monthly payments when compared to lease payments or extended-term financing, though the much different equity positions of leased and financed vehicles should certainly be considered. In the end, the choice depends completely upon the individual’s goals and expectations.
Factors to Consider When Choosing Between Leasing and Financing
When you lease, the only new-car costs you have during the period in which you drive the vehicle are the fixed lease payments and the fuel-and-oil costs. Taxes, licenses, registration, high insurance rates, and warranty charges are all included in your lease payment. This on-the-road cost of driving a new lease vehicle is, in most cases, less than the cost of driving a new financed car, van, or truck. That’s because extensive advertising and costly dealer incentive rates mean more profit for the leasing arm of the dealer and the vehicle manufacturer. And when a manufacturer realizes a higher return from leasing or selling, the cost of leasing or financing is reduced.
Whether you lease or finance your vehicle depends on a variety of factors, including how much money you have, the value of your trade-in, how much you drive, how well you maintain your vehicle, and how you feel about making car payments. It’s not only a question of how much you pay, but also who gets the money. A finance company gets the money if you lease; you own the vehicle after the last payment if you finance. If you lease, you can write off the lease payments in most cases. If you finance, the tax man says you can write off a portion of each payment as depreciation and interest. The plan that’s best for you is the one that provides what you want to get out of leasing or financing; however, it depends also on the relaxation of your auto policy and on the length of your car usage policy or strategy.
