For some people, leasing saves a good deal of money.
Let's take a car that costs $20,000. The estimated resale value of the car is $13,000 after a period of 24 months.
If you buy the car, you will have to pay the entire $20,000, finance charges, and fee. If you decide to sell the car later, then you won't be able to sell it, or trade it, for more than $13,000. That's $7,000 that you are not going to see.
Now let's lease the car. You will pay any possible fees and finance charges. However, you will only pay for the difference between the cost of the car and the resale value, or the depreciation cost. That means that you will pay just $7,000 to lease the car. This gives you lower monthly payments, which can be extremely beneficial for those who need lower payments.
If you want to keep the car, then at the end of your lease you will be able to buy it for the resale value of just $13,000. For some, this works out a lot better than buying the car right off.
So how are the payments different?
There are two parts to a lease payment: a finance charge and a depreciation charge. The finance charge is the money that the lease company finances for you to drive the car. Essentially, you are borrowing the money that your leasing company used to buy the car from the car dealer. The depreciation charge is what you pay to the leasing company and compensates them for the value that the car loses while you are driving it.
Loan payments also have two parts: the finance charge and the principal charge. The finance charge is the interest that you pay on the loan while the principal charge pays off the full price of the vehicle you are buying.
Some people consider part of the principal charge as a depreciation charge like you would get if you leased the car. This is because all vehicles lose value whether they are bought or leased, and they lose value at the same rate. This money is essentially lost because you will never get it back, even if you should sell your car later because the car has lost value.
What's left of the principal payment will go toward equity. Once depreciation has taken hold, equity is what remains of the car's original value when the loan ends. This is your resale value. The longer you drive and own your car, the lower the equity you will have. Once you have driven the car so long that the engine has worn out and the tires are falling off, you will only have scrap value. You will never get back the full amount that you paid for your car.
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