L1 Buying and Leasing Vehicles
Completion requirements
Unit F: Finance
Buying and Leasing Vehicles
One of the biggest purchases that a person will ever make is a car. It is important to know the entire cost when buying or leasing a car. Are there any hidden costs? Is purchasing or leasing a car a good investment?
One major difference between the value of a vehicle and the value of other types of property is that vehicles lose value over time or depreciate. Other types of properties, such as houses, maintain or increase in value over time.
As soon as a new vehicle is driven off the lot, it is worth substantially less than the price at which it was purchased. A vehicle depreciates at a much faster rate when the vehicle is new. The older the vehicle, the less it depreciates per year.
The graph shows the depreciation of a $30 000 car over 5 years.
As soon as a new vehicle is driven off the lot, it is worth substantially less than the price at which it was purchased. A vehicle depreciates at a much faster rate when the vehicle is new. The older the vehicle, the less it depreciates per year.
The graph shows the depreciation of a $30 000 car over 5 years.
Used cars may have higher maintenance costs than new cars. Used cars are much cheaper to buy because the previous owners lost value in their car (paid a high rate of depreciation) since the time of purchase.
There are various options to select from when acquiring a vehicle
- purchasing a new vehicle by paying cash or by financing through the dealership or bank
- purchasing a used vehicle by paying cash or financing through the dealership or bank
- leasing a new vehicle through a dealership
- leasing-to-purchase a new vehicle through a dealership
When a vehicle is purchased, it belongs to the owner. The owner is able to make modifications such as painting the vehicle or adding accessories to it. The owner is also able to sell the vehicle at any time and drive as many kilometres as he or she would like. Once the loan is paid off, the vehicle is considered an asset.
Leasing a vehicle is similar to renting a home. The period of time for a lease is called the lease term. Often, a security deposit is required to be paid to the lender which is returned at the end of the lease. No modifications can be made to a leased vehicle and there is a penalty if the kilometre allowance is exceeded. If the lessee wants to return the vehicle before the end of the lease term, there is a penalty. At the end of the lease, the driver does not own the vehicle. There is an option to purchase the vehicle for a residual value, which is determined when the lease contract is signed.