Car leases are increasingly popular with used-car shoppers who can't afford or don't want to pay for a car upfront. But is it better to lease or buy?
Lease payments tend to be lower than loan payments because most leases are based on three years of monthly payments with about 10,000 miles of driving per year included in the agreement. However, at the end of the lease period, you must decide whether to buy out your vehicle or return it to your dealer.
You will owe your leasing company an "early termination" fee in addition to any fees associated with turning in the car or buying out your lease early. The amount you must pay the dealer when you terminate a lease early is usually much higher than if you are able to fulfill each month of the lease agreement.
To buy out your lease, simply make the final payment at your dealership and you'll own it outright. You can also make a lump sum payment, called "balancing." This reduces but does not eliminate, the monthly payments listed under the purchase option for this vehicle.
Your monthly registration fee may be higher after buying out your lease since many states consider leased vehicles to be commercial cars that require more expensive plates.
Sometimes there are incentives for buying out your car lease, but many times it just makes more sense economically to keep the car after the lease has ended. If you are interested in buying a used car at this time, consider whether you'd be better off with another three-year lease on a new vehicle.
Leasing is an alternative form of financing that involves paying for the use of an asset over an agreed period of time. The main advantage is lower monthly payments. At the end of the term, you can return or purchase the asset depending on your agreement with the leasing company.
Leasing is different from both loan and hires purchase agreements because there are no fixed repayment amounts agreed upon between parties when signing a leasing contract. This means that either party may terminate or renew the contract at any time.
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Leasing is popular in Europe and Asia, especially for luxury vehicles, but it has become more popular in the US during the past few years. The automotive industry has promoted leasing as a way to finance cars with high residual values that are expected to hold their value better than cars purchased with loans.
Leasing requires lower initial monthly payments than car loans because part of your regular payment goes toward depreciation rather than repayment of principal. This means you pay less money each month so the car will be worth its original purchase price after three or four years when you've paid enough in monthly installments for it to be considered fully "depreciated."