Leasing a car can make a lot of sense for many people. New cars are generally a quickly depreciating investment, losing a great deal of value in the first two years. Buying a new car also requires a huge up-front payment. Leasing avoids these problems. It allows those who wouldn’t otherwise have access to a new car to get one. Those who choose to lease are often able to get a car that, new, would cost many times more than their budget would allow.
This comes with some big benefits. New cars almost never break down. All leased vehicles are under manufacturer warranty. Repairs, should they be needed, will be covered.
What Does Leasing a Car in Involve?
If you choose to lease, there are a few things that you should know. Here, we list a number of considerations that will allow you to make an informed decision about whether to buy or lease.
Your Payments Reflect the Car’s Value.
Lease payments will generally be closely tied to the vehicle’s value. If you want a lower payment, look for a car with a lower sticker price.
Higher Residual Percent Saves You Money.
The residual percent is an estimate of how much of the car’s value is retained, month over month, considering depreciation. Cars that hold their value better will generally have lower monthly lease payments.
Understand Your Set Miles.
Most leases will limit the number of miles that may be driven per month. If that number is exceeded, a surcharge will be applied to your lease. It is, therefore, extremely important that you understand exactly how much you will be charged per mile, should you go over your monthly limit. These costs can add up very fast.
Expect a Disposition Fee.
A lease is not exactly the same as a rental. Because of the extensive work required to sell a leased car, once the lease expires, most leases will charge a disposition fee between $300 and $500. This is typically not optional. So be aware of it ahead of time.
Understand What Money Factor Means.
The money factor is just a lease-specific term that means the same thing as annual percentage rate. The lower your money factor, the lower your monthly payments will be.
Is it Better to Lease or Buy a Car?
There is no simple answer. Every individual has distinct needs. But for most people who need the security and confidence in their transportation that can only come from owning a new car, leasing will make considerable sense. The most important thing, however, is that the consumer understands all of the considerations that must be taken into account when deciding between buying and leasing a new vehicle.
You Won’t Own the Car
This puts some strict limitations on how you may use the car. As noted above, there may be restrictions on how many miles you drive without incurring surcharges. Also, you will not be able to sell the car. There may be other restrictions on use. But payments will also nearly always be lower, all else being equal.
Leasing Cuts Down Up-Front Costs
This is perhaps the single largest benefit of leasing. And it will make a real difference for many consumers. Buying a car involves a down payment. In the case of a high-quality new car, this will always be a large sum of money.
With leasing, the only requirement is typically a prepayment on the first month, as well as some other nominal fees. The drive away cost savings from leasing versus buying can easily be $10,000 or more.
No Need to Worry About Selling Car Leases
The prospect of being able to recoup a new car’s cost by selling it will prove to be a honeypot trap for most buyers. Selling a car without experience can be a major headache and can ultimately prove to be an extremely costly mistake. Selling a car is hard work that requires considerable expertise, from fixing things that are mechanically wrong to helping buyers secure financing. When you lease, you don’t have to worry about any of this. You can just walk away.
When you buy a car, technically, you own it. However, this is really only true when paying cash, which almost no one does. With a lease, the dealership or leasing company retains the title. But this is little different from making payments to a lender, who can repossess the car in the event of a default.
One major difference, however, is that you must give the car back at the end of the lease term. Although nearly all leases have an option to buy the car when the lease expires.