Most drivers are so excited about buying a new car, they don't realize how it impacts their finances. Understanding how leasing or buying a car affects your monthly budget, debt ratios and credit score can help you make the right financial choices.
When you buy a car, you might pay for it with savings, borrowed money or a combination of both. You might consider making as much of a down payment as possible to keep your loan amount down. The less money borrowed, the less total interest you'll have to pay.
Getting a car lease or car loan may be your first credit experience. It's important to know that making your car payments in full and on time helps establish a good credit history. Car leases or loans are liabilities, and your payments are included in monthly debt ratios. If you apply for a mortgage, student loan, or credit card while making car payments, you may qualify for a lower amount than if you didn't have them.
When leasing a vehicle, you pay for the reduction in the car's value that happens during the time you're using it. When the term is over, you don't own the vehicle, but you'll usually have the option to buy it at an agreed-upon price.
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One of the financial differences between buying a car and leasing one is how it affects your financial net worth. Your net worth is the total of your assets, or things you own, minus any debts owed, which are your liabilities. When you purchase a vehicle, it becomes an asset and you own it, though a finance company may have an interest in it if you have a loan.
Because ownership of a leased car doesn't pass to you, it isn't your asset. Lease payments are, however, a monthly expense or liability. When you lease a car, your liabilities increase but your assets don't, so your net worth decreases.
On the other hand, monthly car loan obligations can be more expensive than leases because you pay for the entire cost of the car instead of the "use" value.
Whether you're leasing or buying a car, think about the ongoing costs. Gas, car insurance premiums, regular maintenance and repairs add up over time. When you own a car, you pay for these expenses on your own, except for repairs that are covered under warranty. Standard maintenance and repairs can be covered under a lease agreement, resulting in lower costs for people who lease.
A car lease agreement usually includes a restriction on annual mileage. If you drive more than the prearranged annual mileage, expect to be charged for the additional mileage when your lease ends. If you buy out the lease, you may be able to avoid the extra mileage charge. Also, read the fine print on your leasing agreement for any other costs that may be incurred when you start or end the lease.
Think carefully before investing in a new car. Compare the pros and cons of leasing and buying, and ask lots of questions before signing any paperwork.
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