By Darin McGilvra
If you are looking to obtain a vehicle, the choices you make now can determine if you will need a payday loan in an emergency in the years to come. Choosing between a loan and a lease isn't always as clear cut as some would think.
Most people understand the concept of a car loan, in which the borrower is given the money needed to purchase a vehicle in exchange for agreeing to make monthly payments with interest until the loan is paid off. However, a lease is not so straightforward for some.
A lease for a car is essentially a way to rent a car for several years, usually three years. The seller takes the current price of the vehicle and subtracts the expected value of the car in three years, and this is the cost of leasing the vehicle for three years. Your payments would be 36 payments (assuming it is a three-year loan) that would pay off this lease cost plus interest.
Since you do not pay for the entire cost of the vehicle, the payments of a lease are generally smaller than an actual car loan, depending on the length of the loan. The flip side is that you must return the vehicle at the end of the lease or agree to pay for the rest of the cost of the vehicle when it was new.
Also, lease agreements include limits on mileage, since the mileage on a used car affects its value. If you go over the mileage, your lease contract stipulates how much you pay per mile that you go over, which is usually around 20 to 25 cents per mile.
One nice thing about a lease that people don't often consider is that you often end up paying less in interest with a lease, even if you end up purchasing the vehicle with a loan at the end of the lease.This is because the interest is only based on the lease cost during the lease and then on what you owe after that when you take out a loan after the lease. You never are charged interest based on the entire cost of the vehicle, which is what happens with a loan.
Also, most states only charge sales tax on the cost of the lease instead of the entire vehicle cost.
Another advantage is that you aren't committed to more than three years with most leases, while a typical new-car loan is for four to six years. Once the lease is completed, you can just walk away unless you have to pay fees for going over the mileage limit. This means if your situation changes in three years, you won't be stuck making payments you can't afford and may end up having to take out a payday loan in the event of an emergency.
The interest rates you pay should be considered when deciding between a lease and a loan. The higher the rates, the more you save with a lease. If rates are really low and sales are slow, you may be able to pay no interest on a car loan if you hold it to three years. This could make the payments very close to lease payments and you would have a car fully paid for in three years.
In the end, when you are looking for a car, look at all your options and take your time to make a deal. Look at different cars and negotiate for the best price possible, even with a lease.
Don't be afraid to look for a used car, which can only be purchased with a car loan (or cash, if you have it). A used car that is only a few years old will often be a car that had been leased and was taken care of carefully due to contract obligations. You'll get use out of it that is very close to new while saving a lot on the price.
New cars will usually have an extended warranty, so you will have the security of knowing that if a problem arises during the warranty, you won't be forced to take out a payday loan to get your car back on the road.
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