Financing a New Car Explained

There are two overall methods to obtain financing for new car – leasing and buying. Here we will examine the first, lease financing for new car.

The first method is vehicle leasing. Just as in a lease that you would sign for an apartment, the automobile lease financing for new car is a contract that allows you to use the vehicle for a set period of time. Generally speaking, most leases last from 24 months to 36 months, although longer leases are available.

At the time of lease inception, you normally make the first payment (lease payments are made in advance) plus a security deposit (that’s usually refundable), any license and title fees, as well as any inception fees (fees charged by the leasing company for administrative expenses). Depending upon how the lease is structured, you may also have to include money for a down payment (called a capitalized cost reduction). The purpose of the down payment or cap cost reduction is to lower the monthly lease payment.

Leasing has a number of advantages over buying

Lease payments are usually lower than finance payments because you’re only paying for that portion (2-3 years) of the vehicle you are using.

Provided you are within the km requirements (written in the lease) with normal wear and tear, you can walk away from the vehicle when you’re done after paying the termination fee (often waived if you re-lease from the same lender).

You never have to worry about how much the vehicle will be worth at the end of the lease. The bottom could fall out of the market and you still don’t have to be concerned about negative equity.

If you like what you’re driving, you have first rights to purchase it at the end of the lease for an amount written into the lease contract.

Lease financing for new car can also have its disadvantages

You don’t own the vehicle and will never have any equity in it unless you decide to buy it at the end of the lease. Even then, depending on the vehicle, you probably won’t have any equity in it until you’ve paid off a good portion of the remaining balance.

Ending a lease early can be difficult. Early termination charges and penalties can be almost as expensive as making the remaining payments.

Most leases are written for 12,000-15,000 per year (with some as low as 8,000 to 10,000). Higher km can be written into the contract at its inception, but if your overall driving exceeds the total number of km’s written into the lease, the penalties can be steep (.15 to .35 per excess km).

Any modifications to the vehicle that were not there at inception need to be removed and any damage needs to be repaired before the vehicle is turned back in, otherwise the leasing company can charge you for the repairs.

Tags: car finance, car financing