New cars are great, in principle anyway. If only they weren't so expensive. That's where leasing comes in. Leasing lets you get into a new car with little to nothing down and a low monthly payment. What's not to like?
For some people leasing is a great deal, for others not so much. If you've ever wondered whether you should buy or lease a car, this article's for you. We'll go through the advantages and disadvantages of leasing, and compare it with buying. But let's start by reminding ourselves what's so great about a new car.
New cars have a lot going for them. You're not inheriting anyone else's problems or paying for the mechanical abuse they dished out. There's no dirt or debris buried in hard-to-reach crevices and corners. And that's before we think about how good it looks, dazzling the neighbors with factory-fresh paint!
There's also the practical side. There's a warranty in case anything goes wrong and new cars incorporate more safety equipment. Traction control and rearview cameras are standard, and growing numbers of cars come with blind spot warning and even collision warning systems.
Last, there's technology. If you want features like BlueTooth pairing for hands-free calling and Android Auto or Apple CarPlay, you need a new or newish car.
Something else to consider is maintenance. This might depend on the deal you negotiate, but many dealerships provide two or three years free servicing with a new vehicle.
Yes there are lots of advantages to a new car. If only they weren't so expensive! Before you go run out and buy one. Do a little homework and read our tips on how to buy a new car and avoid dealer scams to save the most money possible.
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The best way to think of car leasing is as an extended rental. While you'll have a title document it will state that a leasing company owns the vehicle. You will however be responsible for the annual taxes and insurance. You'll also have to make a monthly payment to the leasing company.
The size of that payment is determined mostly by how much the vehicle will depreciate while you have it. You could think of it as paying for what you use. So after three years if a car is worth 60% of its value when new, your lease payments will total the other 40%.
In addition, you have to pay on interest on the money the lease company used to buy the car. That's because you've effectively borrowed from the lease company to buy it. Then when the lease is up you hand the car back and you're left with nothing.
Leasing has three major advantages:
For business owners there are also some tax issues to consider, but we won't go into those here.
Let's go through each of these advantages in turn.
It's that simple. When you sign the lease paperwork all you owe is the first month's payment plus the various taxes and fees associated with buying any new car. But now, a word of caution.
You've probably seen advertisements for lease deals that look really attractive - $149 a month and similar for vehicles listing at $20,000 or more. Make sure you read the small print. They almost certainly involve a large down payment. That comes off the 40% of the car you're paying for. It also eliminates the no-money-down benefit of leasing.
Use this handy Car Payment Estimator to calculate the payment on any vehicle.
As we explained above, when you lease you only pay for about 40% or so of the vehicle. That's different to buying where you pay the whole 100%. You can spread a loan over a much longer term than a lease, but then you pay a lot more in interest.
When you own your car changing it involves trading-in or selling privately to free-up money for the next one. Leasing avoids that hassle. Just return the old car and lease a new one. This is particularly beneficial for people who like to change their car regularly.
Before leasing was invented everyone bought. At one time people would save their hard earned money for years, then hit the dealership with a wad of bills in their pocket or briefcase. Of course, that approach means waiting until you can afford the car of your dreams, which people don't like to do, (even if it does avoid paying interest.) Today most people buy their new car with a combination of lump sum down payment and money that they borrow.
Before being seduced into signing for that low, low monthly payment, take a moment to consider the dark side of leasing. In particular, make sure you appreciate:
Let's go through each one of these.
When you look at the total costs, leasing is an expensive way to drive a new vehicle. That's largely because new cars take a big depreciation hit in their first three years. Keep a car longer and the average cost per year comes way down.
The more miles on the odometer at the end of the lease period the lower the vehicle's value. That's why every lease agreement includes a mileage limit. Those cheap monthly deals you see advertised usually have a limit of 10,000 miles per year. Go over that and you'll pay $0.25 or more for each additional mile.
Lease costs don't go up a great deal if you do 12,000 miles a year, but if you drive further leasing becomes even more expensive. (The rationale is that there's not much demand for high mileage three year old cars.)
Lease companies don't expect your car to look like new after three years but they want to be able to resell it without a lot of reconditioning. A few months before the lease end they'll send you some information on what wear and tear they consider acceptable and what they will bill you for. If you're looking to lease a car or truck that will lead a hard life, you may be paying for some significant repairs when it goes back.
Most lease deals are for three year terms, as are most warranties. If something goes wrong, the manufacturer covers the repairs and you've nothing to worry about. Consider though a four year lease on a car with a 36 month warranty. Or for that matter, going over the 36,000 mile limit on most warranty coverage. If something goes wrong when the car is out of warranty you're on the hook for the repair costs. That's the case even if you're just days away from turning the car back in. On the flip side, there is no reason to buy a five year extended warranty if you're signing a 42 month lease. Don't let the dealer try and pull a fast one on you.
Say you've signed a lease that lets you drive 12,000 miles a year and then your circumstances changes. (Perhaps you get a new job within walking distance of your apartment.) You won't get any credit (or very little) for turning the car in with less than 36,000 miles on it, even though it will be worth a little more. The result is, your cost per mile goes up.
Use this handy Car Payment Estimator to estimate the payment on any vehicle.
It's possible but very expensive. Depending on the age of the car you could end up paying almost as much to turn it in early as you would have done to keep it to the end of the lease. Some drivers, when they need to do this, can look online for services online that help people find people that will take over your lease for you. However, they are normally very time consuming and rarely work out.
There's no simple answer to the question, "Should I buy or lease a car?" It depends on your priorities and your financial situation. (Do you have a large down payment, and what's your credit score like?) You should also remember that a good, recent model used car will always cost you less than one that's brand new.
No matter which way you go, before you sign the retail contract or lease agreeemnet, read everything. Make sure you understand it, and only then sign your name. You may be a little worn down and just want to go drive your new car, but this is not the time to rush. Just as when you started out on your car search, take your time. You don't want to drive off happy with your purchase only to suffer buyer's remorse later when you realize you signed and agreed to something that you did not want.
Whichever way you decide to go, it's important to have a friend on your side. At AutoCheatSheet, We can't actually stand beside you, but we have hundreds of pages of car buying information, strategies and tips that will help you through the car buying process. Check back regularly for tips and advice on car buying and leasing, and happy motoring!
The number one tip for saving the most money when buying a new or used car is to always take your time and "DO YOUR RESEARCH FIRST!" AutoCheatSheet.com has helped millions of readers navigate the new and used car process and avoid dealer scams.
No matter if you want to lease or buy a new car. I highly recommend using an online referral service such as CarClearanceDeals, Edmunds and CarsDirect before physically walking into a car dealership. Their free online price quotes will automatically include any discounts or cash-back incentives currently available in the marketplace. This information will help level the playing field between you and the dealer. And also let you know right away which dealers are willing to be more flexible on price.
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