Ah, the age old question..should I lease or buy? With the average price of a new car being around $32,000 it is a question many buyers are asking and many of those have never leased or considered leasing in the past. The short article will help answer some of the answers about leasing and maybe dispel some of the misconceptions. Before getting into the meat, yes, used is always a way to go and sure it is a viable option but for this conversation sake, lets just keep it to lease verses buy of new cars.
First, there is no pat answer either way. Both leasing and buying do have their pluses and minuses and there is strong arguments both ways. With I just want to pass along some of the basics by taking the emotion or “this is the way we always bought cars” out of the equation.
Second. Leasing is not leasing is not leasing and not all leases are equal there there are times when leasing makes sense and times when it does not. Of the thirteen new cars I purchased in the past three decades seven were lease and six were purchased oh and there were two used car leases on top of the list too. Yes, used car leases are out there but few and far between and need many qualifications are need for them to make sense. Usually high line again that are CPO (Certified Pre Owned) cars.
When leases Makes sense:
You drive high miles-Yes. But be realistic with what you drive. If you drive 20,000 miles a year, build a 20,000 mile a year lease, don’t buy a 10,000 a year lease and expect your habits to change by it’s self. Building your miles up front in a lease tend to be less expensive than the charges at the end, in some cases by 50%, ask. Some leases will also refund you the extra miles that you paid for if you don’t use them, again ask. Nothing depreciates a car faster than miles on the odometer, let the leasing company take the hit of depreciation.
You come to the realization that you will always have a car payment- If you know that you will have a car payment. If thats the case, why not be in a new car every 3 years and be under warranty and risk extra expenses of out of warranty maintenance? Using that $32,000 car as a reference, putting 10% down and a tax rate of 8% along with an interest rate of about 4%, your payment is still $575 for 60 months and if you want a payment under $500, you have to go a whopping 72 months. Ouch.
You don’t keep a car more than 3 years- See above. Needs change, wants change. How often de we get tired of a ski after a season? not uncommon to get tired or bored with a car after three years.
You are out of equity on the car you are in- Yes it happens, you have a car that you want to trade and owe $10,000 on a car thats worth only $7500. Be it in a loan or a lease, that money has to go somewhere. Why I suggest the lease here is that with the GAP insurance that leases have, if the car is totaled at any point on the lease, you are forgiven that debt. In a purchase, that can still cary over. Am I saying that you will total a car? No, but this is a consideration. After the three years you are out of the out of equity cycle.
When lease do NOT make sense:
You keep a car a long time- I bought my TDi wagon because I planned on keeping it a while, I am going on 4 years and I am happy with it and I plan on keeping it another 4. Leasing didn’t make sense for me in this purchase for that reason. My previous Forester I did lease because A. The lease deal was super strong and B. I only planned on keeping it 2 years (they had a good 2 year lease which is rare). It worked out well because I didn’t like the car.
You are rough on your cars or you modify them- Residuals (the projected future value which is part of the lease calculation) is based upon the vehicle coming back in “average” 3 year old condition so it can be resold. An aftermarket lowered suspension or custom paint job is frowned upon, stock as close to original is better. Now, adding leather or tinting windows tend to be fine but will not change the residual, but ask. So if adding leather is a cost of $1200 you will basically be “financing” the who amount over term of the lease so it will be about $33/mo (plus interest & tax) ) more in the lease. Again, there are exception some lease companies might give a flat projected residual for that leather of say $300 so you will be dividing $900 by the term so it will be $25 plus the other costs.
Like I said, leasing is not leasing is not leasing. I usually suggest leasing from a manufactures leasing program. Why? because they have a vested interest in keeping you happy. They want to have you come back and lease again. A regular bank lease, not as much. A bank has no spot in the vault to keep the car when it comes back off lease. The manufacturer lease also will have perks like waving disposition fee at the end of the lease when you lease again. Programs such as Subaru will waive the first $1,000 of damage to the car, so that cracked windshield won’t come out of your security deposit.
Figuring out a lease:
Not too different from a purchase there is simple calculations that go into figuring out a lease…
MSRP (Sticker Price): The number that the residual is based off of.
Capitalization cost (selling price of the car): Negotiated sale price
Cap Cost Reduction (down payment/money down/trade equity): Unless you want a lower payment, I usually do not recommend putting money down into a lease. If something happens 18 months into a 36 month lease, you lose the balance. If you have money burning a hole in your pocket, there are other ways to utilize it like multiple security deposits that lower your interest rate in the lease and it is kept aside.
Money Factor (interest rate): usually number followed by a decimal and a couple of zeros such as .0014. take that number and multiply it by 2400 and it will give you are interest rate. so that wold give you an interest rate of 3.36.
Term: 36 months tend to be the sweet spots in leases now you will see variations such as a 39 month lease which will use a 36 month residual but will divide the lease cost over 39 months to give a lower payment. The same with 27 mo verses 24 month leases.
Residual: Projected value at the end of the lease based off of the MSRP. a guideline for a strong residual..
48 Months: 50%
36 Months: 60%
24 Months: 70%
- +/- 1-2%
- Based on 12,000 miles a year. 10,000 mile leases tend to add 1-2%, 15,000 mile leases will from the residual 2-3% depending on companies.
- If it gets 5% lower than these numbers, chances are it is not a strong lease and either look at another model or consider purchase.
Acquisition Cost/bank Fee: Basically points on a mortgage, a set amount that the back charges in the start of the lease. This amount amount usually ranges for about $495 to $995 for high line cars. Be careful some dealers will increase this amount for additional profit. When comparing numbers from dealer to dealer with your lease make sure you compare this number along with the payment. This is figure that a dealer can “adjust” for more profit.
Tax: This varies from state to state. Some states will tax just the payment, in some cases a higher percentage than on a sale but you are paying it in a smaller amount. Some states tax the capitalization cost and add it to the payments (divided by the term).
Security Deposit: Usually required with a first time leaser with a new leasing company, this can get waived with very good credit or if you are returning with a another lease.
Disposition fee: Usually $395.00-$595.00 a fee at the end of the lease if you either A. do not buy the car at the end or B. Do not lease another car from that leasing company.
When it comes down to leasing you have to be flexible. not only with in a manufacture but also from manufacturer to manufacture and how they are incentivizing their models. There are times that a Audi A6 might lease for less (or about the same or near) an A4. So be open minded going it. You might have planned on getting a Forester but the new Outback might be incentivized better because it is fresher and when it runs on a 4 year cycle a first year model comes back in that 4th year and is still fresh therefore it will have a good resale value. Look for the deal and ask about perks like BMW, if you are into the lease and you are doing many more likes than you expected, you can pay for additional miles before the end of the lease at the ip front mileage rate of .15 verses waiting for the penalty at the end of .22.
Here is one of the better lease calculators I have found.
When are the most aggressive lease deals:
Usually at the end of model cycle, when a manufacture has a model that is at its end, they will tend to incentives it the most so the deals can be strong. As far as the time of the year, again usually at the end, March is good as is Nov-December when thy do their end of the year push.
What happens at the end of the lease?
You have a couple of options.
Hand the keys back and walk away. Part friends and move on. You will have the above disposition fee and also we responsible for any damage or excess wear and tear of the vehicle.
Hand the keys back and go into another lease from the same company. This is what the dealer/manufacturer wants you to do so they make it the most financially appealing buy waving security deposits and disposition fees.
Buy the car at the end. See if this is advantageous..for you. You are basically buying your own used car. You know the previous owner and you know how the car was maintained and you know it’s idiosyncrasies. Now..is to worth it? What is market value of the car? Is it more or less that what your purchase option in? Is the residual/purchase option negotiable? Ask the dealer then call the leasing company. If you want to buy it, can you CPO the car? Especially with high line cars, you can ask to run the car through their Certified Used Car check list and for a nominal charge, usually $500-1,000 the car will get additional warranty added to the balance of what is left from the factory along with an incentivized interest rate. This is not always an option but again..ask.
I hope this helps you with any questions you might have regarding leasing a car. Now, these are guidelines and there are always exceptions to the rules. I am not saying leasing IS the way to go but it is a viable option and can be pretty straight forward. While leasing might not be for you, does not mean it is not for someone else.