Buying a Car

Buying car is a scenario that most people are familiar with. You pay up front for the entire cost of the car. This usually involves taking out a loan from a bank, buying the car and then making monthly payments to repay the bank. As a result, you obtain full ownership of the car. The bank payment consists of two parts: the principle amount, and the financing charge. The principle is simply repayments on the original money that was borrowed, while the finance charge is the interest, or a fee that the bank charges in return for loaning out the money. You can own the car for long enough to completely repay the bank. Once this point is reached, no more payments on the car are necessary. Another advantage is that the car now belongs fully to you for you to sell or keep as you like.

But buying also comes with some disadvantages. Monthly payments for buying are almost always significantly higher than lease payments. Once you pay the car off, you may have equity in your car, but it is money that you'll never be able to get back out again. Traditionally, automobiles are terrible investments. With very few exceptions, they depreciate in value quickly and as they age are worth only a fraction of their original purchase price.

Leasing a Car

Leasing an automobile started becoming popular in the early nineties. A lot of people enjoyed the benefits of leasing, while others felt that in the long term it was a bad idea. In a sense, both viewpoints are absolutely correct. When leasing a car, you only pay for the depreciation of the car. In other words, as you use the car it declines in value. The monthly lease fee is to compensate the leasing company for the declining value of the automobile. In addition, you pay a finance fee that is essentially covering the leasing company for the money they have tied up in the car (remember - they usually bought the car from a dealership). While it's true that you're essentially paying for a vehicle that you don't own, the advantage to leasing is that you are only paying for the part of the car that you "use up" for the duration of the lease.

While keeping this in mind, you should note that buying outright means that you're in effect paying a lump sum for a car that you haven't even used yet. Another advantage to leasing is that the monthly payments tend to be significantly lower. If you're interested in only owning for the short term, leasing may be preferable. A potential disadvantage is that if you lease the car for too long, you run the risk of paying considerably more than the car is worth. However, the same thing can happen under certain buying circumstances as well. Leasing ten cars over a ten year period would cost far more than owning only one car for that same period. But also consider that lower monthly payments mean you can invest your savings elsewhere. Another factor to consider, nothing is more frustrating than finally paying off a car only to have to start spending money on repairs. When leasing a car, the car is always new, and most repairs are covered in the leasing cost.

To sum it up, buying a car is best if you plan to hang on to the car for a long time and like the idea of ownership. Leasing is best if you want lower monthly payments and plan to keep a certain car for only a limited period of time.