We’re all taught that if something looks too good to be true, it probably is. So what does that mean for those deals you see advertised everywhere? Can you really drive a new Lexus, BMW or Mercedes for $350 or $400 a month? Or are these offers too good to be true?
The fact is, you can have a new car with a monthly payment that low if you’re willing to lease. But there are strings attached. Leasing can be a good option, but it depends very much on your personal circumstances. Deciding if new car leasing is right for you requires a good understanding of both the leasing process and the pros and cons.
Here we’ll explore:
- Leasing basics – what the term means
- How leasing works
- The mileage factor
- The pros of new car leasing
- Leasing cons
- Who leasing works for (and who it doesn’t)
Leasing Basics – What the Term Means
You can think of leasing as a long term rental. You’ll never own the car, but in exchange for a monthly payment you can drive it as you want. (Within reason – drag and circuit racing are not approved!)
A lease deal is for a fixed term, typically 36 months. At the end of that period you give the car back and walk away. Unlike buying, where at the end of the loan period the car is yours, at the end of a lease you own nothing. However, you’ve likely paid less per month than a traditional retail purchase would have cost.
Before you begin the lease or purchase process for a car. You still want to make sure you pay the lowest new car price available for the vehicle you want to drive.
How Leasing Works
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 lease 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.
The Mileage Factor
When estimating what a lease car will be worth at the end of the lease, the company assumes a certain mileage, (because mileage has quite an effect on value.) Typically they’ll calculate this residual value on 12,000 miles per year.
Higher mileage makes the car worth less than projected. To cover this lease companies charge a penalty per mile driven over the limit, often around 25 cents. However, return the car after three years with less than 36,000 miles on the odometer and you won’t get a rebate. That might seem unfair but it’s just the way the system works.
The Pros of New Car Leasing
There are lots of advantages to leasing, although many will depend on your personal circumstances. The main ones are:
New Car Leasing Pros:
- Drive a new car with a lower monthly payment versus financing.
- Drive a nicer car than you might otherwise be able to afford.
- Change your car every three years and get the latest features, styling and equipment.
- Avoid unpredictable repair and maintenance costs because the car will always be under warranty. (Some manufacturers even include free servicing for the first three years.)
- Pay less sales tax, because it’s only due on the monthly payment and not on the whole value of the car.
- No need for a big downpayment as might be needed for a loan.
- Avoids the hassle of selling the car when you’re ready to replace it.
- Tax advantages for business owners. This is a specialized topic, so if it might apply to you ask your tax adviser for advice.
If leasing is so great, why isn’t everyone doing it? Leasing will not benefit everyone. There are many situations you may want to avoid using this option when getting a new car. Here are a few examples of why leasing a car not be right for you:
New Car Leasing Cons:
- More expensive overall. As a lessee you bear the brunt of the depreciation and never reach that happy point after five or six years where it becomes minimal.
- Never build any equity. The buyer who takes out a loan to buy a car has something of value once the loan is paid back. That’s not the case with leasing.
- Mileage restrictions. If your circumstances change and you’re driving more than you expected, you could face a steep bill at the end of the lease period.
- The low mileage “penalty”. Drive less than the agreed miles and effectively you’re overpaying for the vehicle.
- Penalties for wear and tear. Return the car in poor condition and you will be charged for repairs or the reduction in residual value.
- Early termination difficulty. It’s hard, and often expensive, though not impossible, to get out a lease early.
- Need good credit to score the best lease deals.
- “Gap” insurance is often required, just in case the car gets totaled, to cover that steep initial depreciation.
Who Leasing Works For (and who it doesn’t)
Leasing can be a good option if you like driving a newer vehicle, have good credit and don’t cover a lot of miles. This is especially true if you don’t want to put a large sum down at purchase and like the idea of low monthly payments.
If you’re focused on minimizing the total cost of your motoring and are happy to keep a car for a long time, (say five years or more,) you’ll be better off buying. If you finance the car you’ll probably pay more each month than the person who leases, but in terms of total cost you’ll eventually come out ahead. Likewise, if you’re a long distance commuter leasing could work out quite expensive compared to buying.
Lease a New Car if You Want, But Understand the Conditions
Still wondering how you can get into a prestige car for a low monthly payment? Well these deals assume a low annual mileage, a large down payment, and excellent credit. If you’re okay with those limitations, sign those papers. Remember though, the new car buyer probably gets the better deal in the long run.
Be a Smart Car Shopper
Beginning your car shopping online is the smart thing to do. If you are going to lease a car or purchase a car. You will still want to begin the process by finding the best possible new car price first. Most, if not all, dealerships look at online car deals as “high volume – low profit” transactions. This means you will get your best deal by contacting them through the internet.
Do yourself a favor and make online car shopping the way you buy your next car. For more hints and tips on navigating the new and used car buying process, spend a little time upfront before beginning your car leasing journey by browsing through the rest of my website AutoCheatSheet.com.
Once you’ve figured you’re budget and ready to start shopping for you next new car, take a look at my “New Car Buying Guide” for insider tips and secrets on how to get the best price on a new car and avoid dealer scams.
As always, I recommend using an online referral service such as Ryde Shopper or Motor Trend before visiting a car dealership. Their free online price quotes will automatically include any discounts or cash-back incentives currently available in the marketplace.