Many ads play on television which tout how easy and inexpensive it is to lease a car. Ads always make leasing a vehicle seem very attractive to someone looking at new cars. But what are the pros and cons to leasing and does it make financial sense? This article will cover some of the pros and cons of leasing a car, and a few things to know and watch out for before you sign.
How Does Leasing a Car Work?
You can think of the process of leasing a car as to how it goes with renting a house. Leasing allows you some slack financially. However, it may require some concessions that you don’t have to deal with if you buy a car.
The process of leasing a car is simple. You need to find a car dealer first and then discuss your terms with them – you just need to agree to pay a fee to drive the vehicle within a certain period. Usually, this is between two to three years.
The agreement may include certain rules that you need to adhere to like how many miles you can drive annually, and how much you’ll need to pay if you go over the limit.
Details of the car’s warranty will also be included. This will specify what maintenance and servicing are covered and which ones should you shoulder in case you need to pay for it. This one is a bit tricky so you have to make sure that you know your rights as a lessee. Take some time to read or consult with people who are knowledgeable about these types of deals. Don’t just read and sign the agreement, especially if it concerns financial matters.
Once you come up with an agreement, you’ll sign a lease agreement with the lessor. You’ll still need to cash out, but it will be a lot cheaper in comparison to the amount you’ll need to shell out upfront if you opted for a new car.
After the term you have agreed upon ends, you just need to return the car to the dealer. Be prepared to pay extra in case you need to, especially if you return the car with some damage. Remember, you are responsible to pay for these repairs according to the Federal Trade Commission.
The Pros Of Leasing A Car
Low or no down payment: In leasing terms, this is called the cap-cost reduction, and ideally, should be little or nothing.
You can drive a nicer or more expensive car than you can afford to purchase: The up-front costs and monthly payment on a lease is usually less than a comparable car payment, so you can maximize your ability to drive a nicer, more upscale car than you could afford to purchase.
You’re always driving a late model car: Leases are almost always on a new car, and ideally, should terminate in two to three years, so you are always in a ‘new’ car.
Lower monthly payments: The payment is based only on the portion of the car that you use, rather than the entire value, so payments will be lower as long as you get a shorter term lease.
Lower maintenance costs: Since the car is new and the mileage is low, your car will be covered by the manufacturer’s warranty. This should equate to little or no maintenance costs.
Lower sales tax: Laws vary from state to state, but you should be paying sales tax only on the monthly payment, and not on the entire purchase price of the car.
Fewer problems at the end of the lease: At the end of the contract, you return it in good condition and walk away or lease a new one. No hassles trying to sell your car or negotiate a trade-in.
Cons Of Leasing A Car
Over time, leasing will usually be more expensive: Because of higher finance charges and the fact that it’s never ‘paid off’, eventually, leased cars are more expensive.
Lease payments never end: Part of the value of buying a car is that eventually it is paid off, whereas with a lease, the lease payments never end and the finance charges continue to accumulate.
Limited number of miles: Leases come with fairly low mileage caps, usually 12,000 to 15,000 annual miles, with stiff penalties for exceeding them. You need to understand your actual mileage needs and do the math before you lease.
You must maintain the car in good condition: Excess wear and tear penalties can be levied at the end of the lease, and are somewhat subjective. If you have kids or pets, leasing may not be right for you. Also, plan on getting an expensive detail job and possibly minor body work done before you return your leased car.
Early termination is expensive: Leasing companies plan on your paying the lease until it terminates. If you need to get out early, expect to pay enough in fees and penalties that you may as well have kept it through the end of the contract.
You can’t do any customization to the car: Any permanent changes you might want to make to personalize your car are out of the question. Remember, you don’t own the car. Leasing is similar to renting in that regard.
Higher insurance premiums: Check with your insurance company before leasing a car. Your premiums may be much higher than they would if you purchased the same vehicle. Also, you will always have to maintain new car coverage.
Added Costs: Many hidden and additional fees can get tacked onto a lease, similar to fees on purchase agreements, but you need to factor them in before deciding if leasing is the right choice.
Things to look out for when leasing a car
Cap cost: The cap, or capitalization cost is basically the price of the car. When you lease a car, the dealer is selling that car to a leasing company. The amount of the sale is the capitalized cost, or cap cost. Just as in buying a car, you want this to be as low as possible.
Cap-cost reduction or down payment: Anything that reduces the cap-cost is referred to as the cap-cost reduction. The down payment is the most common, but could also refer to a trade-in, a dealer incentive, or a rebate. Reducing the cap-cost is good, but paying out of pocket for a down payment holds no advantage to you over the life of the lease.
Residual Value: What the value of the car is estimated to be at the end of the lease is called the residual value, and you want that to be as high as possible, since the difference between this and the cap-cost minus cap-cost reduction is what the lease payments are based on.
Money value or interest rate: In leasing a car, you are financing money just as if you were buying a car, but the rate is referred to as the money factor and is harder to understand. To calculate the equivalent in an interest rate to determine if you are getting a good deal, multiply the money factor times 2,400.
Lease term: The lease term refers to the length of the lease. You don’t want this to be longer than the vehicle warranty as that would negate one of the advantages.
Wear and tear provisions: You need to understand exactly what constitutes excessive wear and tear as this is another place you can be penalized at the end of the lease. Nobody expects you to return a brand new car at the end of three years, but they do expect it to be in reasonable good condition. You need to understand what that means and what the associated penalties are for failing to meet those standards.
Mileage allowance: What is the allowed mileage per year and what is the cost of exceeding that limit. Take a good honest look at your driving habits and mileage history. Can you meet the mileage restrictions without having to worry about excess fees at the end?
Amount of required insurance: How much insurance are you required to carry on the leased vehicle? Remember, you don’t own this car. The leasing company is going to expect you to be covered in the event of an accident despite the fact that you will still ultimately be responsible. Check with your own insurance agent and find out what this will cost before you lease.
Tire and other maintenance fees: Are there tire maintenance fees, or fees on windshield maintenance and other wear and tear items not covered by routine maintenance? What do these fees cost and what do they cover? Are they negotiable?
Open or closed end lease: Although not as common, some leases require you to purchase the car for the residual value at the end of the lease. Make sure you can walk away unless you fall in love with the car.
Other fees: Many other fees can be levied, including acquisition and disposition fees, security deposits, gap insurance and other drive off fees you might get hit with on a lease. Understand the total cost of driving off the lot with your new car and factor that in to determine if leasing is right for you.
Many people feel that leasing a car is the only way to go. You get a new car every few years for a low payment, and don’t have the hassle of buying or selling. But just like deciding whether to buy or lease a home or any other purchase, you need to understand the total cost of ownership before signing a lease agreement.