The lowdown on leasing
If you’re in the market for a new car, you might be thinking about leasing. After all, it seems very attractive on the surface — so attractive that leases accounted for one-third of all vehicles sales nationally in 2016. Taking a closer look though, you may be surprised to see there's more than meets the eye in some lease offers. So, here are a few need-to-know nuggets about leasing a car.
Cash up front is required.
If you're thinking that leasing gets you out of needing cash for a down payment, think again. That low monthly payment you’re after comes with upfront costs like taxes, registration, tags and other fees all due at signing. This could cost you thousands of dollars. And, if you want to lower the monthly payment even further, you’ll have to put additional funds toward the cost of the lease to get your payment where you want it to be.
Bells and whistles cost extra.
Just like when you’re buying a new car, the extras cost more. Advertised lease specials are usually for the base model — not the one with the navigation and safety packages you’re probably coveting. Adding on all the bells and whistles to your vehicle will mean higher payments because that raises the price of the car. Again, you may have to put an additional deposit down to land the payment you think you can afford.
Not owning means no asset.
Leasing is basically renting a car for an extended period of time — three to five years or so. Unlike buying a car, you won’t have an asset at the end of your lease. Which means you’ll have a decision to make: pay the residual value (the value of the car at the lease's end) to own the car outright, finance the residual or turn in your leased car for another. Regardless, you’ll again need the cash for a down payment or the upfront costs for your next lease — whereas with buying a car you'll have a definitive end to monthly payments. Once your loan is paid off, you can put that money toward savings or paying down debt. Or, you can use your car as a trade-in on another ride or for cash if you ever need to sell it.
Once you're in it, stay in it.
If you get halfway through your lease and decide it’s not for you, you’ll be charged for early termination, something to keep in mind if your financial lifestyle changes often. In some cases, you might be required to continue to pay all regularly scheduled payments or your credit could take a hit.
Understand complex negotiations.
Understanding how a car loan works can sometimes be difficult for a first-timer, and things get even more intricate when you lease. Here are a few terms you may hear during lease negotiations:
Capitalized cost: Cost of the vehicle today.
Lease term: Length of the lease, usually expressed in months.
Residual value: Vehicle’s expected value at the end of the lease.
Depreciation: The difference between the capitalized cost and residual value.
Lease factor, or money factor: Cost of leasing, or interest — usually expressed as a very small number such as .003. Multiply this number by 2,400 to get your interest rate. In this example, that’s 7 percent. As a note, interest rates on leases tend to be higher than those on auto loans.
If you want to ace your lease negotiation, you should study the vocab and have A+ credit, too. You may not get the best deal if you’re unsure about your credit score, leasing terminology or the calculations mentioned above.
Mind your miles.
Depending on how often you get behind the wheel and how far you go, you could be forced to make some lifestyle changes if you lease. Most leases cap mileage somewhere between 10,000 and 15,000 miles per year, or a total of 30,000 to 45,000 miles. Driving over this limit could cost you up to 25 cents per mile.
If you drive 30 miles round-trip for your commute, you’re traveling 150 miles over a five-day workweek. That’s nearly 8,000 miles just driving to work each year — 24,000 miles over the course of your lease. Depending on your limit, that doesn’t leave much wiggle room for things like road trips, traveling to sporting events, chauffeuring the kids to extracurriculars or even grabbing a bite to eat downtown. Those things could be taken off the table if you lease. If the freedom of driving whenever, wherever is something you enjoy, a lease may not be the best option.
The choice is yours.
Leasing might be for you if you want to drive a new car every three to five years, can drive within the limits and maintain good credit. On the other hand, today’s cars can easily last 10 years if maintained well, and once fully paid for, allow you to sock away monthly payments for other things. There are sites that offer side-by-side comparisons of buying and leasing to help you make the right choice. This calculator from Navy Federal Credit Union is just one example. In the end, it's up to you. Armed with the details on the real deal of leasing and your buying options, you're on the road to making the right choice.