Car Leasing or Financing, Which Will Cost You Less Money?

Car Leasing or Financing, Which Will Cost You Less Money?

In hard economic times like these, where many people are struggling to pay the bills and others have been unemployed for months on end, most people show a great deal of concern for paying as little as possible for getting into a new car. Most people are mainly concerned with finding a reliable car at an affordable monthly payment. These same people often wonder whether financing or leasing a car of their choice will give them lower monthly payments. The short and sweet answer is that leasing a new car, as opposed to financing a new car, will most likely give you a significantly cheaper monthly payment.

Why Leasing is Cheaper

You are probably now wondering why leasing a car is cheaper than financing one. Well, this has to do with what you are actually paying for every month when you lease a car. If you understand how to calculate a car lease payment, you would find that your monthly car lease payment has 3 components: the depreciation fee, the finance fee, and sales tax. The depreciation fee is the biggest part of your monthly car lease payment.

When you lease a car for a certain number of years, you are mainly paying for the depreciation in the car’s value over the term of your lease. When you finance a car, you are paying for the entire agreed upon value of the car, plus taxes and interest. The amount that a car depreciates over a certain number of years will generally be significantly less than the agreed upon value of the car. Of course, if you make a rather large down payment on a car that you are interested in financing, you can significantly reduce your monthly payment, but most people probably cannot afford large down payments.

Because leasing is generally cheaper than financing due to the fact that paying for the depreciation of a car costs less, you should always lease cars that have high residual values in order to get the very best car lease deal. The residual value of a vehicle is its projected value at the end of a lease. Dealers use this figure to come up with your monthly lease payment. Vehicles with higher residual values have lower monthly payments because the car doesn’t depreciate or lose its value as quickly.

In summary, leasing a car is generally cheaper than financing one, because your monthly payments are mainly made up of the amount that your car will depreciate over the term of your lease. Paying for the depreciation of your car will in most cases cost less than paying for the entire value of a car when financing.