“Should I buy or lease a vehicle?” This is a common question that we often hear and the answer depends on the specifics of your situation. Many consumers overburden themselves with car payments that they simply can’t afford. What people don’t realize, is how much it can affect your debt ratios and the ability it has to restrict your mortgage financing.
Should you lease or buy?
Leases and purchase loans are two different methods of financing. One finances the use of a vehicle while the other finances the purchase of a vehicle. Each has its own benefits and drawbacks. To determine which is best for you, you need to review your financial abilities and current debt ratios. If you’re unsure of how a car payment will affect you, it’s best to speak with a professional (like us here at Primex Mortgages!) prior to making your decision.
How does it work?
When you buy, you pay for the entire cost of a vehicle, regardless of how many kilometers you drive. This cost includes sales tax and interest, often based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value.
When you lease, you pay for only a portion of a vehicle’s cost; the part that you “use up” during the time you’re driving it. At the end of the lease you have the option to return the vehicle or purchase it for its depreciated resale value. For example, if you lease a $20,000 car that has an estimated resale value of $13,000 after 24 months, you pay the difference of $7000. However, when you buy, you pay the entire cost of $20,000. This is why leasing offers significantly lower monthly car payments.
Both methods include additional fees, taxes and interest or finance rates.
Breaking Down the Car Payments
Loan payments have two parts – a principal charge and a finance charge. The principal pays off the full vehicle purchase price, while the finance charge is interest. All vehicles depreciate in value by the same amount regardless of whether they’re leased or purchased. Therefore, part of the principal charge of each loan payment can be considered a depreciation charge. Unfortunately, it’s money you never get back, even if you sell the vehicle in the future. Although the other part of the principal charge will go towards the equity, the longer you own it, the less you will have.
Lease payments are also made up of two parts – a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money that the lease company has tied up in the car while you’re driving it.
In conclusion, the monthly savings of leasing may give you the option of putting your leftover money into more productive investments. These could include your mortgage or an investment property, both of which will increase in value.