ANSWERS: 2
  • A loan is where an individual borrows money from a bank or other lending agency for the purpose of purchasing an automobile or any other approved item. The money borrowed is paid back in full, with interest, over a specific period of time (e.g., 48 months). Collateral for the loan is provided by the vehicle itself. Until the loan is paid in full, the borrower does not own clear title to the vehicle, so if he or she defaults on payments, the vehicle can be seized and sold by the lender. The borrower is fully liable for the entire amount of the loan, plus interest, even if the vehicle has been repossessed. Once the loan has been paid in full, the purchaser has clear title to the vehicle. A lease-to-own is quite different. The purchaser signs a contract in which he or she agrees to pay a fixed amount per month to lease the vehicle from the owner. These payments do not cover the entire cost of the vehicle and, if the purchaser wants to assume possession of the vehicle, any outstanding balance must be paid at the end of the lease period (e.g., 36 months). The purchaser has the option to walk away from the vehicle at any time, although a financial penalty is usually levied if the individual breaks the lease before the end of the contract period, or wait until the end of the leasing period and pay the outstanding balance to assume ownership of the vehicle. If the purchaser chooses not to purchase the vehicle, he or she may still be liable for any damage to or 'excess' mileage accumulated on the vehicle. A lease-to-own arrangement costs less per month, but the purchaser does not own the vehicle or have any financial stake in it until it is paid for in full. The purchaser is also liable for any damage to the vehicle or anything else that may have caused the vehicle to depreciate more quickly than would be expected. This is the principal advantage of a loan: the purchaser has a financial interest in the purchase from the moment the first payment is made. His or her interest grows as the loan is gradually paid off. An individual in a lease-to-own agreement has no financial interest in the vehicle until after the lease period has lapsed and the outstanding balance has been paid. If you plan to acquire a car and keep it for more than three or four years, a loan makes more financial sense and costs less. Lease-to-own contracts are used extensively by businesses to spread the cost and depreciation of a new purchase over a period of several years. A business can obtain several pieces of needed equipment through lease-to-own agreements, where they might only have enough working capital to finance or obtain financing for a single purchase.
  • An auto loan is a loan you take out and eventually own the car when it is paid in full. A lease to own means you have to fulfill the terms of a lease on the car and are then given the option to purchase the car for additional money.

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