Remember how cars lose 40 – 60% of their value in the first three years? Well, when you lease you’re paying for that depreciation. You don’t pay for the balance of the car because you’ll take it back to the dealership at the end of the lease term. This is what lowers your monthly payment compared to buying.
Let’s look at a simplified example. Say you’ve picked out a smart coupe that retails for $30,000. After three years and 50% depreciation, it will be worth $15,000. So over the three-year term of the lease, you just need to pay back that $15,000.
Of course, it’s not quite that simple. The leasing company, (who actually buys and owns the vehicle on your behalf,) is effectively financing your use of the car, so you pay interest on the depreciation charge. And in addition, they’ll likely add in a few other fees. Typically this $30,000 coupe will cost around $475 per month to lease. On top of that, in most states, sales tax is payable on the monthly bill.
You can lower the monthly charge by making a down payment. In our example, if you put $3,000 down, you’re left paying $12,000 over 36 months. Add interest and you’ll be looking at around $385 per month.