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Leasing Vs. Buying Your Next Car - Part 2

How Leasing Works (Continued)
So what's the difference? - The difference is that amount you pay back.

Whether buying a seven-seater family wagon or a flying DeLorean, loan payments are based on the vehicle's total cost. Just for easy math, let's say you've got a 12-month loan on that $12,000 car, the principal portion of the payment should be around $1,000 a month. With a lease, however, you only pay the vehicle's depreciation back while using it. Intrigued yet?

Well, if that $12,000 vehicle depreciates about $6,000 over that same 12 months, the principal portion of the monthly payment is based on only half that of the loan. Of course, at the end of the day, the car still isn't yours. You have to return it unless you can come up with the remaining $6,000 of the residual value to buy it.

Keep in mind, the net principal you pay back is $6,000 in both cases.

Finance Charges
It seems to be less expensive to lease, right? Well, there is a slight catch. You're not just covering the principal portion of payments; there's an interest rate added to that borrowed money. The interest rate will be higher because the cost of the car is being paid back more slowly. Obviously, that leaves a larger unpaid balance. This outstanding balance is subject to the interest rate charges every month.

Even if your state allows a break on sales tax to offset this additional cost, you'll still have to deal with various extra costs, like initiation or disposal fees, increasing the total cost by hundreds more.

What's worse is that these additional costs multiply if you keep leasing the vehicle after the original agreement has ended (unless you've got a fancy-pants loyalty program to waive them).

Both options have their pros and cons, and it all boils down to your personal needs.

On the one hand - You could opt for a longer-term loan, let's say of six years, for example, which would leave you paying the same low payments each month as on a three-year lease.

If you drive high mileage and tend to exceed normal wear and tear, you should buy. If you want to customize your car, want something that becomes equity, prefer to avoid complicated financial dealings, and don't mind keeping the same vehicle for several years or selling it privately to buy a new one, all those are arguments for purchase.

On the other - If you are looking to change your ride every two years or so, taking out a long-term loan will have you paying so much in interest that you should have just leased in the first place.

If you intend to upgrade to a newer vehicle often, your regular annual mileage is less that 12,000 to 15,000, there's no risk of you exceeding normal wear and tear, leasing makes sense. If you don't want the hassle of trying to sell or trade-in your used vehicle, and you're not concerned about equity, consider a lease.

Both options have a place, and in the end, the choice is yours. It's up to you to make an informed decision!