Make Sure To Do The Math
Dont get us wrong, were not trying to say that leasing a luxury is bad and that you should only finance or buy a certified pre-owned car. But what we do advise to simply do the math and make that the lease that you want to get into makes sense for not only your budget now but in the long run as well.
Reasons Its Smart To Lease A Car Right Now
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Buying a vehicle is a commitment even in the best of times. A down payment ties up a lot of ready cash. You make payments for 48, 60 or even 84 months. And worse, the car loses value as soon as you drive it off the lot, which means you may owe more than its worth for years.
Thats not a great fit in this pandemic-driven recession, where flexibility and adequate emergency savings are keys to financial survival.
Right now the answer to the lease-or-buy question “is a very big ‘yes,’ for leasing,” says Oren Weintraub, president of Authority Auto. He’s advising clients of his car-buying concierge service to at least consider leasing because of the current economic conditions.
You can put little or no money down. You can select a shorter term than a car loan. And the risk of massive depreciation down the road is borne by the bank, not you.
A lot of buyers are coming to the same conclusion: The percentage of buyers who use automakers’ finance arm and choose to lease has risen from 31% to 52% year over year, according to industry analyst J.D. Power.
Questions To Ask Before You Lease
Before you decide to lease a car, consider your priorities:
- Are you looking for a new or a used car? The monthly payments for a new car will likely be less if you choose to lease.
- How many miles do you drive per year? If you drive a lot, leasing may get expensive.
- Can you take care of the cars interior and exterior? If you return the car in poor condition, you may incur additional charges.
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You Will Be Using The Car Primarily For Business
If you own your own business and you will be using the vehicle primarily for your business, leasing makes sense because you can deduct almost all of your payments as a depreciation expense. Check with your accountant or tax attorney before you make this decision as laws in each state may be different.
Driving And Maintaining The Car
This is the part where the lessee drives around flexing on their neighbors for a few months until the lease is up. But they have to make sure they keep the car in perfect condition and be careful not to go over the mileage limit if they dont want to pay any more fees. I dont know about you, but I dont need that added stress in my life.
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There Might Not Be Any Special Incentives
Most higher-end luxury car models dont have any special incentives from the manufacturer, which means that you might end up paying more than you would if you financed the car. Without these incentives, your monthly lease payment could actually end up being more than if you took out a regular loan for the car. In that case, we would recommend either putting a larger down payment and financing it or just finding a certified pre-owned car to get to that same lower monthly payment that you were hoping for.
You Can Buy The Car For Less Than Its Worth
The lease contract you signed many months ago specifies the residual for the vehicle. This is the guess the leasing agent made at the front end of the deal. If the leasing agent guessed wrong, the residual could be less than the current market price for that model vehicle. The good news: The residual is what you will pay to buy your leased vehicle. You already ate the initial three-years depreciation with the lease. Why not take advantage of that?
As the used-car market is shaping up in 2021, its likely your leased vehicle is worth more than the price at which the leasing agent must sell it to you. According to Cox Automotive data, wholesale used car prices increased an average of 5.9 percent in March alone. Thats nearly a 6 percent jump in just one month. Thanks to the short supply of used cars, this trend is expected to continue throughout the year.
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Negotiating With The Dealer
This is another step in the process when the dealer can try to negotiate the lease price and interest in whatever way makes them the most money. Then the lessee makes a down payment, which also has an effect on the size of the monthly payments . Sometimes the lessee is required to pay the first and last months payments up front tooyikes.
Leasing A Car: When Is Leasing A Good Idea
More than a third of all new cars are leased each year. While the lower monthly payments are eye-catching, knowing the ins and outs of leasing is critical to understanding if its a good deal.
So heres a handy guide to what car leasing is all about. Well cover how leases work, whether or not leasing fits your lifestyle, and how leasing can figure into your budget. Well also take a look at the downside of leasing and what to avoid if you decide this alternative to a car purchase is for you.
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How The Leasing Process Works
Dave Ramsey likes to say, To be unclear is to be unkind. So, just in case its still unclear, leasing is not a good idea for anyone. As long as youve got that down, lets talk about how people usually go about doing thismaybe without even realizing that theyre not actually getting any kind of a deal. Heres how it happens:
Finalize Your Lease And Drive Away
Test drive the car you will be truly leasing and make sure it feels right. Confirm the details of the lease with your salesperson down to the penny before you authorize them to make a credit inquiry.
You will likely need proof of insurance to drive the car off the lot. If this is your first car, you can use one of the dealers recommendations or get many quotes online. I use Metromile, an online car insurance company, where you only pay for the miles you drive.
Finally, you will talk to the financial officer and sign the documents for your new lease. He is a skilled salesperson in his own right and will likely try to sell you on maintenance and protection programs. Simple strategy: say no to all. Congratulationsyou now have a great new, leased car!
Happy Driving!
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Why You Should Never Lease A Car
Modified date: Jul. 12, 2021
We make choices every day based on personal preference: coffee versus tea, boxers versus briefs, etc.
Some financial choices, however, arent so clear cut. After all, we cant make spending decisions based on preference alone. If we did, we might all be living in luxury for a brief period before landing in bankruptcy.
An obvious, often misunderstood example is buying versus leasing a car. The decision to buy or lease a car seems like one of preference: Would you rather always drive a new car at a relatively low monthly payment or finance a car that youll someday own outright?
Of course we have to remind you that, financially, the best way to buy a car is to pay cash for something pre-owned to avoid paying both interest and off-the-lot depreciation.
That said, many people arent in a position to pay cash for their cars, and auto loans are the only way they can afford one. Leases, by contrast, allow you to drive a car for a fixed period of time while making monthly payments until the lease expires.
Dont Forget To Negotiate
Many people assume that the monthly payment printed in a leasing ad is etched in stone. But that figure may be based on the manufacturers suggested retail price, which can be negotiated downward just as if you were buying the vehicle.
Be aware, though, that the best lease deals are available only to those with superb credit, and that they may only be cheap because the automaker is trying to clear the decks of slow-selling cars.
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An Example: Buying Versus Leasing For Six Years
Some people need to see the numbers, so we looked long and hard for a lease deal that would seem to beat out buying.
We found a promotion for a 2014 Honda Accord Sedan 2014 lease deal listed by Edmunds.com . After $1,999 down, the lease payments are just $199 a month for a 36-month, 36,000 mile lease. The total cost for three years comes to $9,163. Lets assume you found a similar lease again for another three years. Your total cost comes to $18,326, or $3,054 a year for six years.
The same vehicle had a target price of $20,840 according to car pricing service . If you put the same $1,999 down and financed the car for 48 months at 2.5%, your monthly payment would come to $412.88. At the end of the four-year loan, the total cost to purchase the car comes to $21,817. Over six years, your annual cost would come to $3,636 a year.
So far it seems like leasing is way cheaper by almost $600 a year!
But were forgetting something: After the loan is paid off, you own your car. You have an asset. According to Kelly Blue Book, a 2008 Honda Accord LX in mid-grade condition fetches about $10,000 on the private market. So whether you sell the car or apply the trade-in value toward your next purchase, your actual cost of ownership is reduced to $11,817 or $1,969 a year. Thats a savings of $1,085 a year and $6,508 over six years.
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Not Worth Buying After The Lease
When you lease a luxury car, you do have the option to purchase it after the lease term is up. This option might look attractive because you would now be able to own the car that youve been driving for a few years and are completely familiar with it. However, considering most luxury cars depreciate very quickly, theres a chance that the car might actually be worth less than its residual amount after the lease term is up, which means that its not even worth it to buy it out. In that case, financing it from the get-go could be a better idea.
Shopping For A New Car Maybe Your Current Ride Has Some Wear And Tear Or Youre Interested In Switching To A Car With Better Gas Mileage If Youre Wondering Whether Your Best Move Is To Lease Or Buy A Car Its Worth Considering Both Options
If youre looking for the most cost-effective option over the long term, buying a used car and keeping it for a few years after youve paid it off is often the best choice. But what if you like having the newest technology or the most-up-to-date safety features? Leasing might give you the freedom to make the periodic upgrades youre looking for without breaking the bank.
The truth is theres no one-size-fits-all option when it comes to the age-old question of lease or buy. Still, identifying some key factors related to cost and your personal preferences can help you decide whats right for you.
Lets look at some of the important factors you should consider before talking to a dealer.
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When Leasing Is Better
Leasing could be the better choice if you’re trying to keep your monthly payments low. With a loan, you’re paying for the full value of the car over a few years, which means your monthly payments usually are higher than with a lease.
People who hate worrying about car repairs often prefer leases. It can be incredibly frustrating when your newly purchased car has a major mechanical problem shortly after the warranty runs out. When you own a car past its warranty expiration, the costs of all repairs fall on you. Likewise, excessive mileage and wear and tear will harm your car’s resale value, and youll be responsible for trading or selling your used car if you want a different one.
However, when you lease a car, you never have to worry about repairs. Your car is covered under warranty during the lease period, so you’ll simply bring it in to the lessor’s repair shop to be fixed.
Reason #: You Dont Have To Worry As Much About Repairs
Because the car is owned by the dealership, the warranty will cover a wide range of repairs. However, you will be held responsible for any damage that occurs outside of the warranty. People who lease cars are expected to perform regular maintenance while refraining from modifying the car or putting excess wear-and-tear on it but, on the other hand, you wont get hit with an unexpected and costly repair down the line.
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An Alternative To Long Loans
Some car buyers opt for longer-term car loans of six to eight years to get a lower monthly payment. But long loans can be risky, and these buyers might find leasing to be a better option.
Longer loans make it easy to get upside downwhere you owe more than the vehicle is worthand stay that way for a long time. If you need to get rid of the car early on, or if its destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.
Buying a car with a loan isn’t the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading in early will leave you paying so much in finance charges compared with principal that youd be better off leasing. If you cant pay off the difference on an upside-down loan, you can often roll the amount you still owe into a new loan. But then you end up financing both the new car and the remainder of your old car.
If your goal is to have low monthly payments and drive a new vehicle every few years with little hassle, then leasing may be worth the additional cost. Be sure, however, that you can live with all of the limitations on mileage, wear and tear, and the like.
You Like Driving A New Vehicle Every 3 Or 4 Years
Some people just love driving a brand new car every few years. Maybe they’re addicted to the new car scent, or perhaps they just want to project a certain image within their community.
There are also those who like to have the latest safety and technological innovations in the cars they drive. Getting a new car every 3 or 4 years guarantees you will enjoy the latest bells and whistles cars have to offer.
Finally, there are those who want a certain type of car right now, but know they may need a different kind just a few years down the road. For example, if you just got married, you may want a nice sleek sedan right now, but if you’re thinking about starting a family, you’re going to want a safer, roomier car in the near future.
Whatever your reason, if you’re certain that you’ll be getting a new car in 3 or 4 years, then leasing can be a great choice for you. If you were to finance a car with a typical 60-month loan, and decided you wanted to trade it in for a new one after 3 years – in many cases, you will still owe more money than what the car is worth due to depreciation. It’s much better to lease if this is what you intend to do.
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Reasons Leasing Works Now
Not everyone is a candidate for leasing. But here are five factors that could tip the decision toward leasing rather than buying your next vehicle.
1. Leasing offers a shorter commitment. No one knows what will happen over the next few years, Weintraub says. People are worried about job security and their finances so the commitment of a car purchase isnt as appealing. Instead, consumers are leaning toward leasing because there are affordable two- and three-year leasing agreements available. Also, points out Scot Hall of the lease-trading site Swapalease, leases are more flexible since the contract can easily be transferred to another person without a severe financial penalty.
2. Leasing requires little upfront money. During the recent lockdowns, many people burned through their savings and had little cash left for a down payment for buying a car. But lease contracts can be initiated with little or no money down. Of course, a no-money-down monthly lease payment is higher, but some people still prefer it, Weintraub says. If monthly payments are still too high, its best to consider leasing a lower-priced car to stay in your budget.
3. Low interest rates mean more affordable payments. Current lending rates are at a nearly seven-year low, according to auto site Edmunds, with many no-interest loans available. Weintraub says this substantially reduces the cost of monthly payments.
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