I’m pretty sure I talked about this before, but if I have, it was years ago. And since Fletch has a ton of new readers since then, this is a great topic to revisit from time to time.
Have you ever financed or leased a car or truck? Most of you probably have – they are easily the most popular ways for many people to acquire vehicles these days. Let’s talk about the differences between the two in an overall sense.
When you finance a vehicle, somebody else loans you the full amount to “buy” the vehicle. Typically, the bank does this through an auto loan, but also many vehicle manufacturers have their own financing companies as well.
Either way, it’s the same – the dealership gets paid the full amount by the lender, and you pay the lender back, usually over a term of 4-7 years, with 5 years (60 months) being the most common. The lender keeps a lien against the vehicle (this is noted on the title). And when the term is over, you “own” the vehicle and the lien on the vehicle’s title is released.
With leasing, it’s a little different. You still make monthly payments to a leasing company, but the end goal is usually NOT to own the vehicle (at least on the consumer end – we’ll get to that in another post). What happens with a vehicle lease is you pay for the value of the vehicle that you use. So if you lease a new vehicle for three years, the dealership / leasing company will calculate what that vehicle will be worth, with normal wear and tear, three years from now. You make payments on the difference between today’s value, and the value three years from now, (when most consumers trade it in, and lease another car.)
The preceding is why there are mileage limits on leases – the leasing company needs to have a good idea what condition the car will come back in. They basically say “ok, return this in three years, with less than 36,000 miles, and assuming normal wear and tear, it’ll be worth $xyz”.
Technically, there is a buyout at the end of the lease, where you can own the vehicle if you really like it, but for most consumer vehicles, this doesn’t happen. The goal of leasing is to always have a “new” car every three years or so. Mrs. Fletch does this – she’s always driving a new leased car. Yes, we always have payments on her car, but we never have an 8 year-old clunker in the driveway (well, she doesn’t. Me on the other hand…)
Note the above is a broad based description of the two. And the above is also based on the consumer end of the spectrum – I’ll talk about equipment financing companies and leasing vehicles (financing too) in the next few posts. Maybe even some Section 179 stuff, too!