Understanding the Financing

Understanding the Financing

One of the biggest decisions customers must make when financing a car is to lease or take on a loan. Let us first understand the differences and then discuss the benefits of both.

The biggest mistake people make when comparing a lease versus a loan is thinking that depreciation - the largest cost of a monthly lease payment - is different. They are exactly the same in both cases. It is important to first understand depreciation.

Whether you take on a loan or create a lease, your car is still going to depreciate at the same rate. This means that if your car is worth $20,000 when you buy it, and then $7,000 in 5 years, you still had to pay for the $13,000 that was depreciated over the term.

Here is where the difference between a loan and a lease really come into play. In a lease, you only pay the depreciation of the car throughout the term of the lease. In a loan, you pay the depreciation plus the additional principal that is required to pay the car of within the five year term (or whatever you choose). Do not forget that in both cases you are also paying the interest payments as well as taxes.

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