Auto Loan vs. Auto Lease

Is a car salesman trying to talk you into an auto lease but you are not sure if it is right for you? Or maybe you have a business and your accountant is saying that leasing your new Mercedes is a better tax right off but you are not sure you like the idea. What is a lease and how does it measure up beside a standard auto loan? Is it right for you? Read on as we try to navigate the complicated world of car financing and the auto lease.

What is an Auto Loan?

A car or automobile loan is when a purchaser borrows the money to buy a new or used vehicle outright from either a dealership or a private sale. Lenders can include banks, independent finance corporations, private companies, friends or family. Interest rates depend on the risk the lender is taking by financing the borrower but can range from 0% to 3 or 6% over the national prime rate. At the end of the prescribed time (12, 24, 36, 48, 60, 72 or even 84 months), the borrower owns the vehicle outright and can consider it equity although depreciating equity. Loans are best for people that do not mind paying a higher monthly payment, want to drive the same vehicle for a long period of time, want to modify the vehicle in some way, do not mind paying for repairs at the end of the warranty, drive an above normal amount of miles per year and have a lifestyle that fluctuates or is unstable to some degree.

What is an Auto Lease?

Using an automobile lease as a way to finance your car is a method of paying for the use of a vehicle over a specific period of time. Lenders are banks, leasing companies or financial institutions. Interest rates are usually lower then prime rate but rarely as low as 0%. An auto lease runs for a specified amount of time sometimes as short as twelve months but 24, 36 or 48 are more common. Most leases do not finance the perceived value of the vehicle at the end of the prescribed time as the vehicle will either be returned or bought outright when the lease is up. This makes the monthly payments less but do not think that auto leases are cheaper in the long run. Leasing a vehicle is best for people who prefer to drive a new vehicle ever year or two, do not want a vehicle that is not under warranty, do not want the hassle of owning a vehicle, drive within normal miles each year, do not like the hassle of buying and selling used cars and lead a stable or predictable lifestyle.

Which is better - buying or leasing?

Which type of car financing is best depends entirely upon the individual and their circumstances. Businesses often lease as there are tax benefits that outweigh any negative aspects. Buying outright is often better for an individual but it depends entirely upon their lifestyle. The rule of thumb is leasing is always more expensive over the long term or if the person would like to buy the vehicle outright at the end of the term. Buying outright does not protect the buyer after the warranty runs out and although there is some equity in owning a vehicle outright, it is considered a depreciating asset.

Talk to your accountant and banker for more information and to find out what type of car financing works best for your lifestyle.