Are monthly payments necessary?
Unless you're in the position to pay cash for a new or pre-owned vehicle, you'll need to establish a payment plan to obtain that vehicle. Two options exist - taking out a loan or leasing.
How do loans and leases differ?
When you take out a loan, all of the money used to pay it off applies to your eventual ownership of the vehicle. The initial down payment and principal on the loan cover the total cost of the purchase. Lease payments, however, apply only to the use of the vehicle. The total sum of payments covers the vehicle's depreciation over the time you drive it and is usually less than the outright price of the vehicle.
When is ownership transferred?
When paid in full, a loan terminates and you assume ownership. Your bank sends you the title that had been held while the loan maintained an outstanding balance. When a lease period ends you forfeit the vehicle to the lessor, unless the lessor offers to sell the vehicle afterwards. During the entire lease period the lessor maintains ownership and simply allows you to use the car. Ownership is only transferred if you chose to buy the vehicle after the lease terminates.
How are monthly lease rates determined?
In formulating a monthly payment structure, a lessor is primarily concerned with the extent to which the vehicle will depreciate throughout the lease and the cost of borrowing money to finance the car during that period.
Three key elements:
First, the adjusted capitalized cost is determined. This figure represents the real purchase price after elements such as the down payment, incentive discount and trade-in credit are deducted from the capitalized (actual) cost, while any fees or charges (e.g. destination) are added.
Second, the residual value, or estimated value of the vehicle at the end of the lease, is determined and then subtracted from the adjusted capitalized cost to yield a depreciation figure. The residual value depends on the length of the agreement, expected mileage and make/model of the vehicle.
Finally, a lessor assesses the money factor, a number that correlates with the cost of borrowing money during the lease period.
While these terms may seem unfamiliar, the Federal Reserve Board now requires dealers to publicize all leases' down payment amounts, lengths, residual values and interest rates.
What factors determine the purchase price at the end of a lease?
Most leases rely exclusively on the residual value in determining the end of term purchase price. These closed-end deals require you to pay the fixed residual amount regardless of the actual market price. Open-end leases work differently in that the actual market value helps determine the purchase price. As a customer you are responsible for any difference between the residual and actual value when buying outright.
How are loan rates determined?
The size of monthly loan payments depends on the amount borrowed, the length of the loan, the interest rate and other factors such as your credit history. Paying more money initially lowers the principal of the loan, thus reducing individual payments. At any period during the loan you may opt to pay off the principal in its entirety, at which point the title of the vehicle is transferred to you.
Which option makes the most sense?
The answer to this question depends on how you plan to use the vehicle. If you like the idea of driving a more expensive vehicle for a smaller monthly payment, leasing is a great option. However, if eventually owning the car is important, financing with a loan is the way to go.
What are the restrictions of driving a leased vehicle?
Annual mileage restrictions are a major limitation for customers who choose to lease. Lessors want their vehicles returned in saleable low-mileage conditions, so they place mileage caps on them. A typical yearly figure is between 12,000 and 15,000 miles. Beyond the established limit, fees accrue on a per-mileage basis, usually in the range of $0.10 to $0.25 per mile. So if most of your driving is local, leasing makes sense. However, if you consistently tack on 500 or more miles a week, definitely look into a loan.
What are the other virtues of a loan?
Loans are also sensible for those who want to customize their vehicles, plan on keeping their cars for long periods of time and plan to re-sell their vehicles to help recoup the costs of ownership or expenses of additional cars. For those who quickly wear vehicles out, loans may be safer bets as lessors often add "excessive wear" charges if the car is returned with wear over the limits established by the contract.
As always, if you have any further questions about financing a new or used car purchase at High Country Toyota please contact our Toyota dealership or stop by to speak with our finance team in person. High Country Toyota serves the greater Scottsboro areas of Huntsville, Chattanooga, and Rome and we invite all car shoppers to check out our new and used inventory online or at our Scottsboro dealership. High Country Toyota is located at 3011 South Broad Street and we look forward to helping you finance your new vehicle so you can get on the road in a new or used Toyota in Scottsboro as soon as possible!