Leasing vs Financing: Which one is right for you? (Part 1)
This February, we're gathering our best tips and tricks for buying used cars.
Another common question we get from our customers is: should I lease or finance? While the answer to that question is different for everyone, here are a few things to consider if you’re grappling with that question.
In the first of this two-part series, we’ll dive into the leasing vs financing debate and explain some of the more confusing concepts that tend to trip people up:
What Is Leasing?
Leasing is a form of car financing where you don’t pay for the entire car— you only pay for the depreciation that occurs over the term of the lease, plus the dealership’s fees and interest. There's often an amount due at signing, then the balance of the cost is paid over the duration of the contract in a series of monthly lease payments. Though the concept is simple, leasing a car is a complex transaction with its own vocabulary and a potentially confusing array of numbers.The Terminology
Leasing can be intimidating for some because the process involves a lot of words that most of us aren’t familiar with, or don't’ use every day-- and aren’t usually explained by the sales staff at a big dealership. These are a few terms that you’ll want to know: Capitalized cost: The capitalized cost (or cap cost) is really just the price of the vehicle. When leasing, you should always negotiate this price just as if you were buying the car as this value will directly affect your monthly payment.
Any discounts off the capitalized costs, such as special lease deals from automakers, are called “cap cost reductions.” Residual Value: A vehicle’s residual value is its expected value at the end of the lease period, or the capitalized cost minus the depreciation. This number is rarely negotiable. “Money Factor:” In the language of leasing, the “money factor” is the rate of interest that you will pay. To convert the money factor to a more familiar annual percentage rate, simply multiply it by 2,400. You can do the math yourself, or rely on an online money factor converter to do the interest rate conversion for you.
Term: The term of the lease is the length of the lease, usually expressed in years or months. The most common lease periods are two and three years, though you can negotiate contracts with different terms. Most automaker-subsidized lease deals are for two- and three-year leases.