Should you buy or should you lease? This is the question on the mind of many car shoppers. Leasing is a very different financial transaction than buying. Entering into a lease agreement Is not purchasing a vehicle, but you will still be responsible for things like insurance and taxes. Leasing does not result in you owning a car, thus, it is important to be aware of all outstanding factors before putting money down and entering into a long-term contract.
Before you enter into any agreement, you need to understand every part of the lease. You must know what you are paying for, the residual value, and what the money factor is for the car. You can protect yourself and your budget better when you are apprised of all the details.
Understand How You Will Use the Vehicle
Ask yourself what you are planning to use this automobile for. This is the most important question you can ask. All lease agreements have verbiage about mileage limits, damages that you are responsible for, and other key details. If you are looking to lease a vehicle for business purposes, make sure that a lease is the best interest of your job. For instance, if you commute 150 miles per day for work, or you are going to use it for a ride share program like Uber, then will you violate the lease agreement terms?
While the payment may be lower, it could end up costing you more money in the long run. Lease agreements have firm set limits on mileage, and anything over the allotted mileage is an out of pocket expense. If you can stay within the 10,000-12,000 annual mileage perimeters, then leasing is probably a good thing for you.
What Are You Responsible For?
You must understand what expenses you will be responsible for during the leasing term. What maintenance, taxes, insurance, and even extra car insurance must you pay? Will you need to pay a local excise tax and for common repairs like a broken tail light? When it comes to extra insurance, will you need to pay GAP insurance to help cover the car’s depreciation? There is always a big difference in what you owe on a car and what It’s worth.
Let’s say that you have leased or purchased a car that has a value of $30,000 after having it for two years. Let’s assume that the car has depreciated to $20,000 over that two-year period, but you still owe $25,000 on the loan. You would be responsible for paying the $5,000 difference. Many dealers require GAP because it covers being upside down on a loan.
What Does Your Monthly Payment Cover?
If you want to secure a low monthly payment on a car lease, then you need to make sure you understand what these payments cover. This will help you to see why the dealership arrived at the monthly figure it has. Do the dealer’s math backward to understand what factors into the monthly total.
When leasing a car, you are agreeing to finance only a portion of the car’s purchase price. For instance, if the car has a total cost of $50,000, but the dealer estimates that it will be worth $30,000 after three years, then you will need to pay the dealer $20,000 for the use of the car. If you do a bit of research and you figure out that the vehicle will depreciate faster than anticipated, then you will be overpaying on that lease. The vehicle’s residual value must be acceptable or you should look at another car to lease.
Is your credit score strong? If so, then you should make sure the dealer is offering you a great interest rate. With leasing, it’s about the money factor and not the APR. An interest rate might be expressed as a percentage, like eight percent, a money factor is used on a lease. A money factor could be a decimal point like 0.0029. When the dealer uses a money factor, simply multiply this figure by 2,400 to come up with the interest rate.
Making sure you understand the monthly value of your lease payment is a really big deal. Never be afraid to ask questions, even if you think they are dumb. It is your responsibility to understand the math. Leasing is a great option if the numbers work for you.