Once you’ve decided on the car of your dreams, your next move is to determine how you will pay for the vehicle. Unless you’re lucky enough to be able to pay cash for your new car, you have three basic options: leasing, purchasing with a traditional loan or a balloon payment. Which one is right for you?
With a conventional loan, you finance the cost of the car, depending on how much money you put down and how much you get for your trade-in. When you pay off the loan, in anywhere from three to five years – unless you choose to pay down the loan sooner – the vehicle is all yours.
If you lease, however, the bank actually owns the car you are driving. Your monthly payments will be lower than if you buy. However, since the financial institution is at least in part responsible if you are in an accident, the bank will require you to have more liability insurance than you might need. When the lease is up, you can purchase the car at a price predetermined by the financial company when you originally signed the lease. This value is known as the ‘residual’ value of the vehicle. Or, you can return the car and lease another automobile. If you decide to purchase the vehicle at the end of the lease, you’ll have to pay the sales tax on the residual portion of your vehicle.
Another option is a balloon payment, also known as residual based financing. This option works very similar to a lease with two primary differences: sales tax and vehicle ownership. With a traditional lease, you only pay the sales tax for the portion of the vehicle you will use, and the finance company retains ownership of the vehicle. With a balloon financing arraignment you pay for the sales tax of the entire vehicle upfront, and your name is on the title of the vehicle. But just like a lease, you have the option to purchase the vehicle for a lump-sum (balloon) amount at the end, or you can turn in the vehicle to the finance company.
Why you should buy:
- If you drive a lot of miles each year, generally more than 18,000 miles per year.
- If you intend on keeping the vehicle for a longer period of time, generally for more than 7 years.
- You like the freedom of being able to drive as much as you want, and do not like mileage limits.
- You can sell the car whenever you please or use it as a trade-in on a newer vehicle.
Why you should lease:
- If you like to drive newer vehicles, and change them every few years.
- If lower payments are a priority for you. Generally, lease payments are lower than finance payments.
- If you want to keep your maintenance bills lower. Since you’ll be driving a newer vehicle and you’ll only have the vehicle a few years, the vehicle will be covered under factory warranty, and should need very little standard maintenance.
Why you should consider a balloon payment:
- Similar to leasing above, but sometimes have lower payment options or sales tax advantages available.
- Available on pre-owned vehicles.
- If you think you may have more money in the future, compared to today, this is a flexible option for you to consider.