Most people do not have enough funds to buy a car for cash and therefore should be decided by one of the two methods of financing available in the market. Many choose a traditional loan, while others prefer to sign a lease or lease. Both options have their particularities and do not fit all circumstances so you have to study what is the best circumstance when making the decision. This is very important because the lease generally carries a lower monthly installments and can be very tempting, which can be a double – edged sword for many buyers.
What are the pros and cons of each option.
Advantages of lease:
• While similar to traditional financing in its methodology, the lessee does not acquire ownership of the vehicle. With the lease the lessee acquires the right to exclusive use and enjoyment of a new car for a certain period of time and a predetermined number of miles. The consideration for this right is the payment of the depreciation suffered by the car during the agreed period, which is paid in monthly installments spread over the life of the contract, applied the same as interest rates used in contracts for vehicle sales.
• The main advantage of lease is that the lessee can enjoy a vehicle of more value than he would normally buy since he only will pay for the depreciation of the vehicle. This is enhanced by the fact that the best vehicles depreciate less so in relative terms he paid less for them. This obviously, means nothing to those who do not have the money to pay the fees.
• Most leases or lease last 3 years or less, which is the typical length of the factory warranty period for new cars. This means that the car is under warranty for repairs during the period of the lease. In any case, the lessee remains responsible for the maintenance of the car, including oil changes, tire rotation and other services recommended by the manufacturer. In this case the recommendation becomes a requirement.
• For those who would like relatively a new car is important, the lease is the best option. At the end of the lease the lessee will end up with a car with low miles to be replaced by a completely new vehicle, with the added advantage that unlike the case of a traditional purchase, the lessee does not end up with a terribly depreciated car on his hands.
• Another point to consider is that with a car leased, the lessee does not worry about getting the best possible price to sell it or use it as part of payment. When the lease ends he only has to return the vehicle and move on.
Disadvantages of lease:
• As we said before the duration of the lease is conditioned by two factors, one is the duration of the contract and the other a maximum number of miles allowed used to estimate the depreciation of the car. Those individuals who reach the number of miles before completion of the contract have two options: they can park the car until the time comes to return or face the penalty for excess miles, which is calculated at a predetermined price per mile, can rise very quickly reaching considerable amounts of fees.
• In a lease financial institution is the real owner of the vehicle, and the contracts require maximum protection for their investment. Thus lease contracts involve an obligation to buy insurance policies for the widest possible coverage, which are usually quite expensive.
Advantages of buying a car:
• For those who like to have and keep their cars for long periods (until they fall off the wheels), buying may be the best option. The purchase transfers ownership of the car with a security interest in favor of the financier, which will allow them to repossess the car in case of nonpayment.
• At the end of repaying the debt the buyer can forget the painful monthly payments getting a chance to save money.
• Finally, with the purchase of a car there are no restrictions on miles driven per year which makes this method the most convenient option for those drivers who travel a lot of miles annually.
Disadvantages of buying a car:
• The car is not an investment; it is an expense and a very large expense. Unless the buyer plan to keep the vehicle for the time it takes to become a classic (25 or older) we must be prepared to receive a good financial blow.
• Buying a vehicle involves risk on its resale value. When you drive home the new vehicle loses on average 9% of its value and there after annual depreciation is around 15%.
• It may occur that during the life duration of the contract the buyer has a negative value, i.e. the car is worth less in the market than what the buyer owes the bank. At that time the buyer is unhappy virtually tied in the car unless it is willing to take a strong financial blow to get rid of it.
• Another factor that should be considered by those who are evaluating the possibility of buying a car is that the amount of monthly payments is inversely proportional to the duration of the agreement, so that a long -loan results in much more affordable monthly payments.
However do not be fooled, the longer the duration, loans accumulate a greater amount of interest which in the end, it becomes a more expensive the loan.