May 1, 2010
Why are car leasing deals better than renting a car? What does it mean to lease a new car? Essentially, leasing is the same as renting. The ultimate way to decide on whether to buy or lease, will come from what you want over the next few years. Most likely you will lease/rent a car for 2-6 years and then have the option of buying the car or giving it back to the dealer. There is no cut and dry choice when determining whether leasing or buying is the better choice. Your economic situation will play the largest role in your lease versus buy decision. Calculate the difference between buying and leasing. It may become boring to drive and watch other new car models and brands come out, it could be tempting for someone who wants a change. When you have the option of getting into a car and know that it is just for a short time, you might feel better about the purchase.
Why do leases have lower monthly payments than loans?
When you take out a loan to purchase a car, you are paying the entire purchase price plus interest over a fixed period of time. When you lease a car, you are paying the difference between the purchase price and the projected residual value and you only pay interest on that amount.
Example: You’ve negotiated and determined the price for a Toyota car lease to be $20,000. If you want to lease the car for three years, the dealer will determine what the car’s value will be after the three years of depreciation. Let’s say that after three years the car is estimated to be $11,000. Basically, you will be paying $9,000 (plus interest) over three years. If you choose to take out a loan, you will be paying $20,000 plus interest over three years, and therefore you will have higher monthly payments. But, you will own the car at the end of the three years.
Why You Want To Lease
Lower Monthly Payments
You are not paying for the whole car—just a portion. Monthly lease payments can be up to 60% less than purchase payments per month.
Evolve with the cars. Instead of driving the same car for 10+ years, you will be driving a new car every 3-5 years. If you look forward to new makes, models and features, or if you like that new car smell, leasing is your ticket.
Are You Down with the Payment?
Because the total amount that you are paying over the course of your lease is significantly lower than if you were to purchase the vehicle, you aren’t required to fork over as large a down payment (if any) when you sign.
Say Goodbye to the Shop
If you are leasing the car for 3-4 years, the odds of major maintenance issues are unlikely. If something were to occur, you should still be under warranty.
Save Money on Taxes
When you lease a car, you are paying the depreciated amount of the vehicle over the lease period. Therefore, you are only being taxed on that amount. Plus, you are not paying that tax in one lump sum—it’s spread out over the course of your lease payments—similar to your insurance.
Why You Want To Buy
When you make loan payments, you are gaining equity. Equity is ownership. At the end of your loan, you will own your car. When your lease is up, you will have nothing to show other than a bunch of payment slips.
You Will Always Have a Car
Not only will your purchased car become an asset, but the bottom line is that you will still have a car after the loan has been paid off. Sure you will have paid more than Joe Leaser, but Joe Leaser will be riding his skateboard 20 miles to work once his lease is over while you will be driving your car.
When you are done paying for a car—there are no more payments. If you buy your car, then there is a light at the end of the payment tunnel. If it takes four years of paying $500 per month to purchase a car, but keep the car for an additional six years, you essentially paid $200 a month for 10 years. In addition to paying such a low fee over a long period of time, the car still has re-sale value.
When you lease, you are usually allowed between 10,000-15,000 annual miles. If you think you will exceed that allotment, then you can buy extra miles at the point of purchase. You never know how much you’ll actually drive—lots of things can happen during the course of your lease. If each mile over the limit is $0.25 and you end up going 6,000 miles over your allotted amount, you will owe $1,500.
Wear and Tear Penalties
What defines ‘wear and tear’ is a bit abstract. Most lease contracts define ‘normal wear and tear’ to mean that if you have any significant interior/exterior blemishes, you will be penalized.
Early Termination Penalties
Just like switching phone carriers in the middle of a contract. If you wish to get out of your lease early, it will cost you. If you lock yourself into a lease, be sure that you honor it—for money’s sake.
Because leasing is the same as renting, your credit will have to be in better shape than if you were buying. You might need a co-signer. Find your credit score.