Leasing a car is a mystery to some folks and it’s understandable. The majority of people either buy a car and commit to payments long-term or they rent a car for a very short period of time and return it within a week. The happy medium is to lease a car, a great option for people who want to drive a more expensive car but just don’t have enough money to buy it.
Buying a car is more costly the day of purchase. You’re going to need a down payment, sometimes a first payment, and of course, you’re committing to a long-term payment arrangement that could span decades. Some people don’t want to go through that hassle. Since leasing a car means you won’t ever own it, at least through the leasing agreement, there are certain benefits and downsides to leasing that you need to be aware of.
What Does Leasing a Car in Involve?
Leasing a car is a great deal because not only do you pay less money up front, but you also have a car that’s covered by warranty for the duration of the lease. This means less in repair costs. That’s only the tip of the iceberg for what leasing a car means, though. Here’s a quick leasing cheat sheet to keep handy.
Car’s Value Helps Determine Payments
A more expensive car will cost you more to lease. This isn’t all that hard to understand and is common sense for most folks. It’s important to keep in mind though. If you want a really nice car, the higher payments are worth it.
Higher Residual Percent Saves You Money.
Residual value is what you would buy the car for at the end of the lease, after the car’s value has depreciated. The rule is that the higher residual percent of the car, the lower the monthly payments.
Understand Your Set Miles.
You’re only allowed to drive the car for a set number of miles per month. If you go over, you owe a fee for every mile over.
Expect a Disposition Fee.
Leasing agencies will charge a disposition fee at the end of your lease that will be between $300 and $500. This fee is for cleaning the car up and re-selling or leasing it again.
Understanding Money Factor
Money factor is a huge term in leasing. It’s the way of assessing the amount of interest that will be applied to a lease and helps determine the monthly payments. It can be converted to the APR as well. Find your money factor and times it by 2,400 to determine APR.
Is it Better to Lease or Buy a Car?
The answer to this question depends on your situation and financial circumstances. The biggest advantage of a lease is that you can get a better car for less money up front and then drive it for a fairly large period of time. So even if you can’t buy that brand new Mercedes, you might be able to lease it, and this is a good option for people who aren’t quite financially stable enough to afford a luxury car. To help determine the answer to this question, just keep these things in mind.
You Won’t Own the Car
You’re never going to own a lease car through a lease agreement. If ownership is your priority, leasing isn’t the best option.
Leasing Reduces First Payment
You pay less money down on a leased car. There is no down payment. If you want to avoid a down payment, this is a great option. Unlike buying a new car, you don’t pay a down payment because the car itself will never be yours to own. This reduces your up front costs and is a terrific reason to lease for people who are on a strict budget but still want to drive a really nice car everyday.
No selling your car lease at the end
At the end of the lease, your responsibility ends. That’s the best reason of all to lease for some folks. You don’t get stuck with obligations after the lease is over. As long as you pay the disposition fee and you’ve made all payments, you’re free to decide what to do next, with no strings attached to the previous lease agreement. Some people choose to turn the car over while others go ahead with a purchase.
At the end of your payments, you’ve completed all requirements. You will have the option to purchase but some people feel that purchasing a leased car isn’t always the best option because it has depreciated in value. Whether or not you purchase is entirely up to you, but just remember that you might be stuck unable to buy at the end of a lease, in which case you simply hand the car back to the agency that leased it to you. That’s acceptable to some people, but for those who are focused on ownership, leasing isn’t always the best way to go.