It's no secret that auto leasing is making a come back. In fact, auto makers and banks are making every effort to capture every opportunity in this diverse and every changing industry. However leasing is not for everyone and the purpose of this article is separate myth from the facts and help you understand how leasing works and if it really benefits you.
First, let's take a closer look at some of the key benefits of leasing.
1-Your credit report will show a smaller amount of debt
When leasing a car or a truck, you borrow less money than if you decide to buy it. To understand this, let's say you're looking at a car with the Manufacturer's Suggested Retail Price of $30,000. After all the calculations are set and done, let's say your lease monthly payment is $300 per month for 36 months. If you decide to lease this vehicle, you will be carrying a $10,800 debt ($300 x 36) vs buying it and with no money out of pocket, you will be carrying, roughly, $30,000.
2-You won't have to deal with the depreciation of the car on your own
It is a known fact that most cars and trucks depreciate the most during the first 2-3 years of ownership and by leasing you will share the depreciation with the bank.
3-You get to drive new cars every couple of years
Because you will always be under the factory warranty, you won't need to contemplate on whether or not to buy an extended warranty for your car.
4-You have multiple options at the end of the lease
This one always gets people confused. Yes there are leasing companies that charge you for terminating your lease early or selling your car before the end of the term and you should always check for all of these fine prints when buying a car. However, for the most part, you can sell or trade your vehicle before the end of the contract. In fact, many dealerships realize this as an opportunity and try to get you back in the dealership for an early trade in. You need to be cautious of this option to make sure the new deal makes financial sense to you but sometimes it makes sense to get out of the lease early. Remember, if the dealership buys your leased vehicle for their inventory, there will be no inspection at the end of term for excess wear and tear or damages so you can walk away.
5-Upfront knowledge of vehicle's end of lease value
This is called the "residual value" and it's derived from industry's leasing guru sources such as ALG, Back Book, NADA etc. The residual value is the end value of the car after an estimated depreciation for the term of the lease is calculated. This amount is a percentage of the vehicle's MSRP and is set by the leasing company (not the dealer). To calculate the end value (residual) simply ask your dealer to provide you with the residual amount or percentage. You then multiply the percentage by the MSRP and the result is your residual amount. Please note that every model and trim may have a different residual.
As you can see there are many benefits to leasing, but there are drawbacks too.
1-You will have to carry a higher insurance coverage
Currently, the majority of leasing companies require 100,000/300,000 comprehensive and collision coverage on their leased vehicles. If you currently have lesser of coverage, you may feel the pinch when you receive your quote from your agent.
2-You'll have to keep an eye on a few things
At the end of the lease, the leasing company (lessor) sends out an inspector to verify the odometer (and make sure you're not over the limit) and also to look for any excess wear and tear. Always remember to either buy the car before the leasing is over or trade/sell the car and get into a new one to avoid mileage penalties and excess wear/tear charges.
3-Often you need a good credit to qualify
If your credit is less than perfect you may want to consider financing at first to improve your score.
At last, remember the following tips for saving money and making sure you get the best deal when shopping for your new car:
-Never be afraid of saying no to a deal and walk away
-Always do your research and prepare before visiting the dealership
-The best deal is the deal that makes sense to you and doesn't cripple your finances
Which one would you consider, buying or leasing?
Leave a comment and let me know.
Amazon Price: Buy Now
(price as of May 11, 2016)
Amazon Price: $62.45 Buy Now
(price as of May 11, 2016)