Should You Lease or Buy Your Next Car?

Research Before Signing a Car Lease

Is it smarter to buy or lease a car? Leasing a car is not appropriate for everyone.  Before you commit to a lease be sure to understand how a typical lease is structured, all the costs associated with a lease, and what happens if you need to terminate before the lease term is completed.

What is a Car Lease?

When you lease a vehicle, you don't own it. You get to use it during the lease term, for a monthly fee, but must return it at the end of the lease. In many leases, you have the option to buy the vehicle at the end of the lease.

 

Key Terms

Capitalized Cost -The price you and the dealer agreed upon for the vehicle.  The Cap Cost or Lease Price should be significantly less than MSRP even though some Dealers will insist this price is non-negotiable. Capitalized Cost includes an acquisition fee which is not always specified in the contract.

Capitalized Cost Reduction– Capitalized Cost can be reduced by rebates, factory-to-dealer incentives, trade-in credit, or a cash down payment. When you subtract cap cost reductions form cap cost you arrive at net capitalized cost or adjusted cap cost.

Residual Value– The wholesale value of the vehicle at the end of its lease term, after depreciation, is called its residual value, or sometimes called it's resale value.  The higher the residual value at the end of the lease term, the more the car is worth, and the lower your lease payments will be. Look for lease terms whose 36-month (3 year) residuals are at least 50% of their original MSRP value.

Money Factor–  This is the implied interest rate for your lease term.  Money factor can be converted to an annual interest rate (APR) by multiplying by 2400 ( It is always 2400 and is not related to the length of the loan in months). For example, a money factor of .00297 multiplied by 2400 = 7.13% APR . The Money Factor or interest rate is not required by law to be included in lease contracts so you will need to ask the dealer what the Money Factor is.  This is where your credit score can impact the Money Factor Rate you qualify for.  Before you shop for a lease check your credit score, get your free credit score at www.annualcreditreport.com.  Resolve any issues with your credit report before applying for a lease.

Lease TermLease term is the length of time in months your vehicle will be leased. Typical lease terms are 24, 36, or 48 months, however terms such as 30, 39, and 42 months are frequently used to have your lease expire and get you into the showroom during a slow sales period.

Advantages of Leasing a Car:

  • If You like to drive a new car every few years you will probably pay less by leasing rather than buying.
  • Since lease payments are usually lower than monthly loan payments for any given car many people upgrade to a more expensive vehicle than they could purchase with conventional financing.
  • Very often leasing often requires little or no down payment.
  • If you own a business leasing may provide tax benefits if vehicle is used for business purposes.
  • Maintenance and Repairs will most often be covered under warranty.

Disadvantages of Leasing a Car

  • If you lease your cars, you will always have car payments. If you look forward to paying off your car and owning it free and clear, leasing is not for you.
  • If you decide to purchase the car at the end of the lease period, you will pay several thousands of dollars more than if you had purchased it initially.
  • Most leases will charge you up to 25 cents per mile if you exceed the annual mileage limit — usually between 12,000 and 15,000 miles. If you drive more than 15,000 miles per year , leasing probably isn't for you.
  •  Breaking a lease early is very expensive. You will typically owe all remaining payments less depreciation that hasn't happened yet.
  • In most states, if the car you lease turns out to be a lemon, the leasing company will have to file a complaint in order to get redress since you do not own the vehicle.  (For information on laws protecting you if you buy or lease a lemon visit US Better Business Bureau)
  • Leasing companies require  high levels of insurance, which can be expensive.  If the vehicle is totaled insurance typically covers the market value of the vehicle which will typically be less than the residual value.  It is usually advisable to carry gap insurance which will cover the difference between the market and residual value.

Make sure you know what the final cost will be before you lease a car.  The Federal Consumer Leasing Act requires lease agreements to include among other things, the total amount due, a statement of costs (such as the number and amount of regular payments), insurance requirements, and any penalty for defaulting on lease payments. To arrive at the final cost, multiply the total monthly payment times the number of months in the lease.

Bankrate's Buy vs Lease Calculator is one of the best calculators I have seen, as long as you provide accurate information this calculator will tell you if leasing makes sense for you.

Stay Connected with The Frugal Toad

Subscribe to our e-mail newsletter to receive updates.

, , , ,