Once cars reach a certain age, the maintenance and repairs can nickle and dime you to death. Everyone would love to drive a newer car, but most people can’t afford to buy one outright. The cost of new cars keeps going up, and financing may not be an option.
However, there is a way to drive a new car and save money in the process. Leasing a car is much cheaper than buying a car outright. In addition to the money you save upfront, you save on expensive repairs and maintenance. Leased cars are covered under manufacturer’s warranties, and leases generally expire well before the car starts to wear out and need expensive work to keep it running.
What Does Leasing a Car Involve
Leasing a car is different than just buying a car outright. If you have never entered into a lease agreement before, you need to understand the differences and what is unique about leasing agreements.
Leasing Cuts Down Up-Front Costs
When you purchase or finance a car, generally you need to pay a large down payment or trade-in another car. Leasing does not require a large down payment which makes it an affordable option for most people. Generally you can pay just the first month lease, a security deposit, and some taxes and fees. If you want to pay an additional amount upfront to lower your lease payments you can, but it is not required.
Your Payments Reflect the Car’s Value
When you either purchase or finance a car, the payments depend on how expensive the car is, the interest rates you pay, and other fees. Just like purchasing, when you lease a car the payments depend on how expensive the car is. The more expensive the car, the higher the lease payments will be. Make sure you select a lease option that fits comfortably within your budget.
Higher Residual Value Saves You Money
A residual value is what the car is worth after the lease is over. Another word for it is “salvage value”. Lease payments take into consideration the value of the car after the lease period. A higher residual value will save you money because the lease payments will be lower.
Understand What Money Factor Means
The money factor is the finance rate for the lease. To translate the money factor into an APR rate, multiply it by 2400. This will give you a number you can compare to current interest rates to determine whether or not you are getting a good deal.
Understand Your Set Miles
The residual value is based on a certain amount of mileage driven each year. The more miles a car is driven, the less it is worth. Make sure you understand how many set miles you are allowed to drive each month or year and what the fee is for going over those set miles. Some leases allow you to negotiate additional miles upfront if you think you will need them.
When the lease period is over, you return the car to the dealership. Most lease agreements provide an option if you want to purchase the car for the salvage value at that point if you want to keep the car.
Expect a Disposition Fee
A disposition fee covers the dealer’s cost to dispose of the car after the lease period is up. Some dealers may waive the fee if you enter into another lease with them. Generally, the disposition fee is between $300 – $500 and is due when you return the car.
You Won’t Own the Car
While you save money with a lease, you need to remember that you do not own the car. You are only “renting” the car from the dealership who retains ownership. This means you can not change the car (ie upgrade the music system), sell the car, or put it up for collateral against a loan.
No Need to Worry About Selling Car Leases
One of the big advantages to leasing a car is that you do not have to try to sell the car at the end of the lease period. Just turn it back into the dealer and upgrade to a newer car if that’s what you want to do.
Is it Better to Lease or Buy a Car
There are pros and cons to both buying and leasing a new car. To understand which is a better option for you, make sure you understand the differences in ownership and responsibilities. In addition, do the math to calculate the difference in payments and total cost. Leasing a car can be a great alternative to purchasing, if you understand how it works.