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Buy vs. Lease - Finance or Lease a New Car

Updated on May 31, 2013

Finance or Lease

Unless you are paying cash for your new car or truck, you will need to borrow money. This will involve either financing or leasing. the basic difference between these methods is that with financing, you are actually buying the vehicle and will own it at the end of the payment period. With leasing, you are essentially paying for the use of the vehicle and its depreciation. At the end of the lease, the lender retains ownership.

Monthly leasing payments can be typically lower than financing payments because you are only paying for the portion of the vehicle you use; however, financing contracts can be more flexible when you want to sell or trade in the vehicle before the contract end date. Leasing contracts can be difficult and expensive to break.

In either borrowing scenario, you should know your credit or FICO score. This is a numeric expression of your creditworthiness, ranging from 300 to over 800. It is based primarily on your your credit report information. Your ability to borrow money and interest rate you will be charged will be based on your credit score. The higher your credit score, the lower the interest rate you will typically be charged.

Finance and Lease Terms

Acquisition Fee: The fee charged by a leasing company to do the paperwork.

Book Value: The published value of a used car.

Capitalize Cost: The amount of money you finance in a lease.

Closed-End Lease: The leasing company assumes all the risk that the vehicle's value at the end of the lease is not less than the estimated residual value.

Dealer Invoice: What a dealer pays the manufacturer for the vehicle.

Depreciation: A vehicle's drop in value as a result of being sold and aging.

Down Payment: Any money you put down to reduce a vehicle's price.

Interest Rate: The yearly cost of credit when you finance or lease, expressed as a percentage.

Monroney Label: The price and features disclosure on the window of a new vehicle.

MSRP: Manufacturer's Suggested Retail Price. This is the price posted on the Monroney Label.

Open-End Lease: You assume the risk that vehicle's value at the end of the lease is not less than the estimated residual value.

Pay-off Amount: The amount you still owe on a trade-in vehicle.

Purchase Option Fee: A charge the leasing company may charge you if you want to purchase a vehicle at the end of a lease.

Rebates: Incentives, usually cash, which a manufacturer provides toward the sale or lease of a vehicle.

Reconditioning Reserve: A security deposit held by the leasing company to pay for any damage to the vehicle at the end of a lease.

Residual Value: When leasing, it is the predicted dollar value at the end of a lease.

Sales Tax: The percentage of the transaction price paid to the state.

Trade-in Value: The amount of money your current vehicle is worth toward the purchase or lease of a new vehicle.

Upside-down Loan: When you owe more a vehicle than it is actually worth. Also known as negative equity.

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