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Buy or Lease a Car? (Car Shopping Basics 1/5)

Buy or Lease a Car? (Car Shopping Basics 1/5)

Meet Joan. Joan is a recent college graduate
who just got a great job at Corporate Co.’s sunny LA branch. She’s very excited. There’s just one problem. Because her office
is far away and out of reach of public transportation, Joan is going to have to get a car. Unfortunately,
she has no idea where to start. What should she do? Well, her first step is simple: understand
what car she needs, for which we recommend the free research website Kelley Blue Book. Then, assuming Joan has found the car she
wants, she’ll need to decide between leasing it, or buying it. Leasing is when you rent a new car for a short
period of time, generally three years. As for how it works specifically, well, whenever
you lease a car, you sign a lease contract, which covers the difference between the price
of the new car, say $20,000 and what the dealer thinks the car will be worth at the end of
the lease period, say $10,000. In a sense, this lease contract is a lot like
a loan. You’re forced to repay the balance, in this case $10,000, over a fixed period
of time with interest. However, because this contract only ever covers
the difference between the car’s current and future value, rather the cost of the entire
car itself, it will always have smaller monthly payments than a true auto loan. In addition,
leased cars also have one other advantage: they’re covered from beginning to end by
the manufacturer’s warranty. Sounds pretty great right? Well, maybe, but
lease contracts come with four serious drawbacks. One: They require excellent credit.
Two: They’re complicated, and generally charge hefty fees if you ding-up the car or
exceed a maximum number of miles driven. Three: They’re difficult to get out of without
paying major fees and penalties, though some of these can be avoided by using our recommended
lease swapper. Four: They’re inherently expensive. This
should makes sense. After all, leasing a bunch of cars over a 10 year period should be more
expensive than buying one car and using it for many years. Because of these reasons, buying a car over
leasing is almost always the smarter financial move, even in the short-term. However, Joan doesn’t have to buy a new
car. In fact, Joan should seriously consider avoiding it. That’s because, on average,
a new car loses loses 45% percent of its value within the first three years of ownership. However, used cars, the most obvious solution,
also have serious problems, especially when it comes to maintenance and repair. Fortunately,
there is a workaround: certified pre-owned cars. These are less than 5 years old, have
less than 80,000 miles, and have undergone an extensive exam to ensure they are still
operational. This makes them cheaper than a new car, but much less risky than used cars.
Pretty cool right? Hopefully you and Joan now understand how
to choose between buying and leasing. Be sure to watch our next video, where we’ll walk
you through financing a car, and be sure to check out our website, where you can find
more educational materials and free auto loan and car-buying recommendations.

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