Buying vs. Leasing
The Benefits of Leasing if You Have Poor Credit
There are various ways to finance your car. Purchasing is the most common, but leasing can offer important advantages – particularly for people with credit challenges or no established credit history. Leasing is quite simple, but because many people are unfamiliar with it, they assume a bad credit car loan is their only option. Nothing could be further from the truth.
Here are some of the benefits that leasing can offer vs. purchasing:
- Lower monthly payment
- Better quality vehicles
- Lease-to-own option
- Less maintenance and likelihood of repairs
- Little or no downpayment
- Taxed only on the portion of the vehicle you use
- Helps rebuild your credit rating more quickly
How Leasing Works
Leasing is a popular form of car financing because it allows people to drive the vehicles they want — typically better ones than they could otherwise buy — for less money per month. That’s why approximately 75% of all luxury cars are leased. When you purchase a car, you pay for the entire vehicle and all sales tax up front. To keep car loan payments affordable, they are typically spread over a long period of time (up to 7 years). With leasing, the terms are generally shorter (3-4 years), and you pay only for the value of the vehicle that you use up during the term of the lease; in other words, the difference between the value of the car at the beginning and end of the lease (its depreciation during your use). As a result, lease payments are typically lower than purchasing over the same financing term.
Leasing a car does have some similarities to purchasing a car. Regardless of which financing option you choose, you are still responsible for all maintenance, repairs, insurance, and license fees. When you sign a lease contract, you agree to make regular payments (e.g. monthly, bi-weekly or weekly) and take care of the vehicle for a set length of time (usually 36 or 48 months). You have a responsibility to make sure the vehicle is returned in good condition with normal wear and tear and mileage. Otherwise, the actual value of the car at the end of the lease (residual value) will be lower than what you agreed to in your contract.
Another Way of Looking At Leasing
Let’s say you purchased a vehicle with the goal of selling it three years later. The selling price you could actually get for the car after three years would depend on its condition (i.e. how you cared for and maintained it, and how many kilometres you put on it, etc.). The more you sell the car for, the less it ultimately cost you to drive during those three years. The residual value of a lease is like your selling price. However, a car’s residual value at the end of a lease is determined up front, and your lease payments are based on the vehicle being worth that amount at the end of the term.
Leasing isn’t for everyone. If you tend to be hard on your vehicles, like to modify them, or typically keep them until they die, purchasing a vehicle may be a better option for you.
The Language of Leasing
There is specific terminology that you’ll hear when you lease a car, so we’ve provided a simple glossary below:
Capitalized Cost: Also known as the “cap cost” or lease cost,” this is the value of the vehicle at the beginning of the lease.
Capitalized Cost Reductions: There are ways for you to lower the Capitalized Cost that will be used to calculate your lease payments. If you make a down payment or trade-in a vehicle, these Cap Cost Reductions help lower your lease payments.
Adjusted Capitalized Cost: This is simply the Capitalized Cost of the vehicle minus any Cap Cost Reductions (down payment and/or trade- in). This is the cost that will be used as the starting point of your lease payment calculation.
Residual Value: During the time you lease the vehicle, it is subjected to the normal wear and tear of driving. As a result, its value will go down – or depreciate. The Residual Value is what the vehicle is estimated to be worth at the end of the lease, based on historical and projected resale value data for that specific make and model.
Interest Rate: When you lease, the company you’re dealing with has used their money to purchase the vehicle you’ll be driving. Like a car loan, part of your lease payment will be to cover your interest charges.
Term: This is the length of time you’ll be leasing the vehicle. It is usually expressed in months, and typically ranges between 36 and 48 months. For people with bad credit, the shorter term of a lease allows them to rebuild their credit more quickly than a car loan.
Get A Fresh Start
At Ezee Credit, one of our Automotive Credit Specialists can help you decide if leasing is right for you. We have a great inventory of reliable, late model cars, vans, SUVs, crossovers and trucks to choose from – or we can find the specific make and model you’re looking for. And because we can finance you directly, we’ll customize a lease with the shortest possible term and payment schedule so you can successfully re-establish your credit and begin a fresh start. That includes our popular Lease-to-Own program that combines affordable monthly payments – and a low buy-out at the end of your lease. It’s a great way to continue driving the car you love.
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