Video: Leasing vs. Buying a New Car

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This video takes a practical look at the different ways to pay for a new vehicle.

Video Transcript

JEN: Woahhhh. Leasing or financing options available. Hmm…

COMMANDER: Can I help you?

JEN: Yeah! I want this… but I'm not totally clear on the difference between leasing and financing a spaceship.

COMMANDER: Well it's just like leasing or financing a new car. Except this car happens to reach 50,000 miles per hour and can navigate in outer space. But other than that, it's exactly the same!

JEN: Right. Right. Right. The problem is I don't know the difference between leasing and financing a new car, either.

COMMANDER: Well it's not rocket science! Here, let me show you. Leasing a car is like agreeing to rent it for a fixed term of three to five years. You pay a deposit, you make monthly payments, and at the end of the term, you return the car and can start the process over again with a new car. Financing a car means buying it with the help of an auto loan. You pay a deposit, you make monthly payments, and once the loan is paid back, you own the car. In general, lease payments are lower than financing payments.

JEN: Woah. Woah. Woah. Leasing means I get a brand new spaceship every few years and payments are lower? Sign me up!

COMMANDER: Not so fast space cadet. You need to understand that your monthly payments are designed differently depending on whether you're leasing or financing. When you're buying a vehicle, your monthly payment goes to repaying your lender, plus interest. Once the loan is paid back, your payments stop and you own the vehicle, unlike leasing where your leaser owns the car and you continue to pay monthly the entire time you're leasing.

JEN: So if I lease a vehicle, what exactly am I paying for if I don't get to own it?

COMMANDER: Good question. You're not paying for the entire car when you lease. You're paying for the value you use up during the time you're driving it. So if you're leasing a vehicle that costs $21,000 new and the leaser estimates that it'll be worth $10,500 at the end of your lease term, your payment will be calculated from that difference, plus some interest to sweeten the deal for the leaser.

JEN: So that's how lease payments are always able to look so good.

COMMANDER: Right. In the short term, based on monthly payments alone, it's cheaper to lease than to finance. But once you've paid back your auto loan, that changes because you no longer have to make monthly payments. Plus, you get the benefit of any residual value if you decide to sell or trade-in your car after some time. Of course, there are other factors that can influence the value over time. When you own a vehicle, you assume responsibility for major repairs down the road, where as leased cars are well covered by a warranty. But leasing can come with all sorts of surcharges, like mileage overages, excessive wear fees, and leased cars often have higher insurance rates, too. It all comes down to what's important to you. Some people prefer to drive a new model every few years, even if that means limiting their mileage. Others prefer the freedom of ownership and being able to drive as much as they want and customize their vehicle however they want. What sounds good to you?

JEN: WOOOOOOOOOOOO! Okay, I'm sold. For me, financing is definitely the way to go. How much does this baby go for?

COMMANDER: Twenty-one billion dollars.

JEN: On second thought, I can't do the space travel thing because I'm allergic to, uh. Stars. Okay, well. How much does this space suit go for?

COMMANDER: Twenty-five million.

JEN: Just the helmet.

COMMANDER: Six million.

JEN: This random tube thing.

COMMANDER: One point five million.

JEN: Is there anything here in my price range at all?

COMMANDER: We have freeze-dried ice cream in the gift shop.

JEN: Sold!

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