The decision to lease or buy a car can be both a complicated and personal choice. On the one hand, it can be less expensive on a monthly cost analysis to lease a car than it can be to buy one outright. With that being said, at the end of a loan, or even in the middle of a car loan, you can sell your vehicle for however much you want, considering you have a buyer willing to pay that price. With a leased car you will have no equity.
Leasing a car is becoming ever more popular among consumers, and this is great for the car manufacturers and dealers for a number of reasons. For the right individual, leasing a car is also a beneficial option. The right person for a lease is someone who finds value in having a new car, but doesn’t want to own one themselves. Leased vehicles are a good option for someone trying to keep their monthly payment as low as possible and someone who doesn’t want to go through the hassle of selling a car down the line.
Let’s talk about how leasing a vehicle works.
What Is Leasing A Car?
Leasing a car is essentially like renting a property. You are paying to use the asset, and are responsible for maintaining it (depending on the terms of your contract) outfitting it with tires when needed etc.
An important component of leasing to consider are the current interest rates being sold around in the economy. This is crucial to the overall affordability of a vehicle, because leasing is in its most simplistic form, just another way to finance a car.
How Leasing Has Changed
For a great many years now, the majority of car leases have been in the luxury car sector. This is slowly growing to encompass SUVs and even small utility vehicles. As more people opt to lease vehicles, it allows the vehicle owners AKA the dealerships to charge less for the lease. So yes leases are becoming less expensive!
Reasons To Lease A Car
Here are the top reasons why people are choosing to lease their car over buying it outright:
Payments: Your monthly payment will be lower when you lease a car versus buying the same car.
Your monthly payment will be determined by factoring in:
- Sales price- How much you would pay for the vehicle if you were to buy it outright
- Length of the lease- How many months you will be renting the vehicle. Typically the longer the lease, the lower the monthly payments because it spreads out the depreciation.
- Expected mileage: A car is devalued the more miles it is driven. When you sign the lease for your car you will agree to mileage terms and a rate that you will pay for each mile over the agreed-upon maximum mileage. The less you agree to drive, the less you pay for the vehicle each month.
- Residual value- This is how much the car is worth at the end of the lease. Should you decide to purchase the vehicle after your lease, this is how much you will pay sticker price.
- Rent charge- This is the amount that you are paying simply to rent the car. This doesn’t include the depreciation of the car that you will pay or any taxes or fees.
- Taxes and fees- These are added to the cost of your monthly payment.
Get A New Car Often: Another reason people love leasing cars is that they get bored of driving the same old car. With leasing, you have the opportunity to get a new car every few years.
Stress-Free Maintenance- Most leased cars offer a 3-year warranty so you won’t be responsible for repairing the vehicle, though you will still pay for standard maintenance like oil changes and tires. You are also leasing a new car which shouldn’t need much in terms of maintenance, to begin with.
No Resale Hassle: You don’t own the car so when the lease is up you don’t have to jump through the hoops of selling the car.
Maximizing Tax Deductions: For those of you who use a vehicle for business reasons, a leased car will afford you more in tax deductions. This is because the IRS allows you to deduct depreciation as well as the cost of financing when using a car for business purposes. Luxury vehicles have different rules and will not allow for as much of a write-off.
Why Leasing Is Great.. For The Dealership
Leases add to the supply of the used car market. People who choose to lease a brand new car cover the depreciation cost of the vehicle in those first few years where the vehicle loses value the most quickly. A leased car will usually have a low mileage odometer reading. This is because they entice the person leasing the car to keep the mileage low by charging per mile for every mile over your yearly limit. This limit is typically between 10,000 and 15,000 miles per year.
It is another added benefit that when people are finished with their leases they have to return the car in person to the dealership. This gives the dealership the opportunity to sell them into another car, get them to buy their leased car, or set them up with another lease.
Another way that dealerships are boosting their profits are by offering short term leasing options, usually around the 36 month mark. What this effectively does is covers the high cost of the depreciating vehicle in the first few years by having the person leasing the car cover the depreciation. It can be beneficial for some individuals as well because it can be enticing to have a short term contract.
The Pros And Cons Of Leasing
Ownership: When you purchase a car, you are the owner and it is counted as an asset in your net worth (minus of course the liability of any financing that you used to purchase.) When you lease a car, you have no ownership claim in the vehicle and will miss out on any potential resale value. When you own a car you can keep it for as long as you want, but under a leasing agreement, the vehicle must be returned at the end of your contract unless you make the decision to buy out the vehicle after your lease has ended.
Up Front Costs: When you lease a car you usually have to provide a lump sum of money upfront to secure the vehicle. This lump sum will generally include the first-month payment, a refundable security deposit, an acquisition fee, down payment, taxes, and sometimes dealership fees. When you purchase a car by contrast you will have to pay for the full amount of the car upfront either out of pocket or using a financing option. When you purchase using financing you will need a down payment upfront.
Monthly Payments: Leasing a vehicle is typically a great way to save money on a month to month basis. That is because a monthly lease tends to be cheaper payment wise than taking out a loan and buying the same car outright. Leases simply factor in a rental fee for the car and the depreciation costs of the vehicle. Buying a car by contrast will be more expensive, but you will be able to sell the car whenever you see fit to recoup some of its value.
Early Termination: When you lease a car and you decide you want to terminate that lease before your contract is up you will be heavily penalized. In some cases, these fees may be as expensive as finishing out the contract and using the car for those X many months. In some cases when you are purchasing a different car from them, a dealership may purchase your leased vehicle which can let you off the hook. When you own a car, you can sell it at any time for whatever reason, and if necessary can use the funds from the sale to pay off the loan on the car.
Getting Rid Of The Car: A car that is leased is practically hassle free to return. Simply return it to the dealership and that is that. You may have to skirt some salespeople who will be trying to get you into a new leasing contract, but for the most part, it is really easy. When you want to sell a car you own it is more complicated. You can sell the vehicle or trade it in. Regardless, it is more challenging than simply ending a lease and dropping off the car.
Future Resale Value: A leased vehicle is still owned by whoever is leasing it to you and you have no claim to the equity of the car. Similarly, when the car depreciates it doesn’t mean much to you. When you own a vehicle and it depreciates, it does kind of stink. Whatever the value of the vehicle is when you go to sell it does still go into your pocket though.
Wear and Tear: Similar to when you rent an apartment you are allowed standard wear and tear on a leased vehicle. Before signing the contract, review what the dealership’s definition of normal is so you aren’t hit with surprises when you return the car. Should you exceed what is considered normal, you will pay heavily in fees for the value destruction of the car. In contrast, when you own a vehicle you can devalue it all you want and no one is going to penalize you except your bank account when you go to sell the car.
End Of Lease Term: At the end of your lease, that’s it, no more payments. When you return the car you get your security deposit back assuming you haven’t excessively damaged the vehicle. When you finish a loan on a vehicle you have built equity. You can choose to either hold onto that car or put that equity towards another vehicle.
Customizing a leased vehicle: When you return a leased vehicle it must be in resale condition, therefore any customization or part upgrades will have to be removed and replaced with the manufacturer part and if there is residual damage from those upgrades you will have to pay to fix the vehicle.
Other Helpful Tools
If you are looking for more information, and a step by step walk through on whether leasing a car is right for you check out this awesome YouTube video from Whiteboardfinance
Whether leasing or buying a vehicle is the right choice is completely subjective to your situation and preferences. When deciding between the two choices, get quotes for both, and weigh your options.
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Whether you lease or own your car, on average, you can save between 15 and 25 percent and in several cases as much as 50 percent on your auto insurance. With the rising cost of insurance today, it’s important to have an agent who is experienced, knowledgeable, and dedicated to helping you find the most discounts and the best coverage available for all your insurance needs to protect your most valuable investments.
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