While many people prefer cash payments when buying a new car, others might opt for a loan or financing from banks or institutions. If you prefer opting for a car loan, there are certain principles and processes you need to know about before you take any further steps.
Lease vs Loan Term: A lease is basically a contract for a short period of time that allows the lessee to use an asset for the stipulated time. Whereas a loan involves the borrowing of funds, that will be repaid in installments, towards owning the car.
A lease costs less because one is paying only for a short period of time and there is no ownership involved after the term of the lease ends. The lease term generally spans 24 to 36 months, whereas, in the US, an average new car loan goes up to 70 months.
Loans come with various repayment options. The customer has the choice to decide the duration of the loan. However, the longer the loan duration, the higher the interest rates. Many loan terms last for more than 5 years and it has become increasingly common for people to opt for longer durations. Longer loans allow buyers to shell out small payments each month, and focus on other financial requirements, at the same time.
A lease has its own advantages. The upfront down payment is quite low and monthly payments are lower when compared to loans. It generally runs parallel with the car’s warranty.
For instance, if a company offers a warranty of 3 years, then your lease lasts for the same duration. While this might be a tempting offer for many, there are many flaws that come with a lease agreement. The wear and tear charges, mileage limits, and other fees add up to a huge amount by the end of the lease. This will have to be borne by the lessee.
Additionally, a lease agreement doesn’t lead you towards ownership of the car. A loan agreement, on the other hand, lets you own the car. You can even decide to sell it or trade it, in order to recover your costs. There are no limitations from the loan provider as long as you make timely payments towards the loan amount.
Short Term vs Long Term: A short term lease lasts only for two-three years. A lease can last for a maximum of five years but that is very rare. Long term loans are generally expensive as one ends up paying more interest. The interest rates also tend to be higher. A shorter loan means higher down payments and huge monthly payments but eventually lower costs in the long run.
What’s an Ideal Choice?
If you’re someone who wants to opt for a loan agreement, then you need to decide the duration of the loan you’d like to go for. One may end up opting for cheaper monthly payments, however, it is advisable to opt for a shorter duration.
It reduces the interest rate and also lowers the sum amount of interest paid and allows you to own the car sooner. Additionally, the sooner you get out of a loan agreement, the higher your chances of being debt-free. A lease can be a great option, provided you plan to change cars in a couple of years and don’t want to be tied down to a loan agreement.
The kind of agreement that suits you best depends on your requirements. Whatever type of agreement you opt for, you need to plan for it well in advance.