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Economics of Leasing a Car

Leasing a car is an alternative to buying a new vehicle. While it offers lower upfront costs and flexible mileage, leasing has some drawbacks. The lowest mileage allowance will likely limit the amount of driving you to do. Those who drive more than ten thousand miles a year are likely to find these restrictions annoying. Nevertheless, a low mileage allowance may not be a deal-breaker for you.

One drawback of leasing is depreciation. While car payments on a new vehicle are lower than those on a lease, monthly payment for a leased car is much higher. In addition, drivers may be tempted to lease a luxury car when they can afford it. This may be the case if they need a new model all the time. Another disadvantage of leasing a car is that you can’t customize it the way you want. Another downside of leasing a car is that you won’t own it until the lease is up.

Leasing a car involves several costs: up-front payments, monthly payments, and the end-of-lease cost. The cost of a car is called its capitalized cost, and the upfront payment is usually lower than the monthly payments. Some leases include service contracts, car insurance, and warranties. A money factor is the interest charges you must pay on the car. The money factor is usually multiplied by two-four to get an APR or annual percentage rate. If you pay a money factor of.005, this translates to a twelve percent APR. Also, use tax is often paid instead of sales tax.

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