Auto Finance Explained: An Introduction

Payments are different for auto finance for leasing vs. buying a car. Payments when leasing have two parts. Depreciation, which is part of each payment compensating the leasing company for the portion of the vehicle value that was lost while you used the car. When leasing you also compensate the leasing company for interest on the money the lease company has invested in the car while you’re using it.  Payments for buying a car have two parts. You are paying on the actual cost of the car, the principal and on the interest. The interest is the charge for borrowing the money to purchase the car. Although your payments are lower when you lease, that doesn’t necessarily mean you’re getting a better deal than buying. The car depreciates at the same rate, whether you lease it or buy it.

Some car owners consider leasing as a means to drive a more car than you can afford and getting a new car about every three or so years. Leasing an auto can be much more complicated than auto financing to buy a car.  You are, in essence, leasing the car from a leasing company and not the dealership. 

Banks, dealerships or car manufacturers can all be defined as leasing companies.  Make sure when you lease a car you are educated and aware of what the contract actually entails. There are fees involved with leasing that you won’t see in buying a car. There may be extra fees at the end of your lease period that could cost you a pretty penny. Fees for non matching tires and over the contracted mileage penalties.

If you do choose to lease rather than buy, do your homework.  Don’t get caught at the end of your lease with the question, why didn’t I just buy?

Auto financing is the tool that can help you get places. Just act responsible in your decision-making process, and you’re almost there.


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