|By Siddarth Nagaraj on February 16, 2011
When acquiring any possession that requires a major financial commitment, we always search for the manner of doing so that best fits our constraints. Obtaining a car requires several long-term investments and involves making several key decisions. Perhaps the most basic of these is the choice of what means one should use to acquire a car. Leasing and buying may each sound more attractive than the other depending on your viewpoint, but their favorability is determined by your own situation.
It is crucial to establish the distinctions between buying and leasing in order to understand the respective merits and disadvantages of both options. To begin with, full purchase of a vehicle (buying) allows you to keep it after the financing term has term has ended, thereby placing total ownership of the car in your hands. In contrast, if you lease a vehicle you do not own it and are therefore obliged to return it after the time period for the lease has expired. If the owner of the vehicle is willing to sell it, you may of course purchase it at that point.
The choice of whether you should buy or lease a vehicle really depends on what your financial priorities are and to what extent you are willing and able to invest in a vehicle according to your needs. Since you are paying for the entire cost of a car when you buy it, you should be certain that you want a single vehicle that you will regularly use over a long period of time (certainly more than two to three years). On the other hand, if you will use the car for only a few years and hope to gradually upgrade, leasing may be a preferable option. By leasing the vehicle, you are paying a portion of its cost which is proportional to the amount of time you use it. In either case, it is important to gauge how much you will realistically use the car. Unlike buying, when you lease you can choose not to make a down payment and pay sales tax only on your monthly payments. You will probably have to pay a security deposit (and possibly additional fees) at the start of the lease.
Additionally, you should be able to differentiate between lease payments and loan payments. Lease payments consist of a depreciation charge and a finance charge. The former compensates the owner of the vehicle for its loss in value during the time period of the payment, since cars depreciate in worth over time. Finance charges constitute interest on capital invested in car by the lease company. Loan payments also have a finance charge, which is simply interest on the loan taken. The other component of loan payments is the principal charge, which pays the full purchase price of the vehicle.
Comprehending the differences between buying and leasing will help guide you in the process of determining which of the two is the better solution for you. The answer to that query lies in your priorities and financial abilities. It is up to you to assess which is right for your situation.