It has often been a tough call to choose between purchasing and leasing a car. Purchasing involves, on the one hand, higher monthly prices, but essentially you own something. On the other hand, there are lower monthly payments for a lease, but you are entering a period where you never stop paying for a car. Currently, more people choose a lease than just a couple of years ago over a car loan. And it looks like the leasing boom will not end in the near future.
What Is A Car Lease?
Leasing is a form of financing for cars where you don't pay for the whole car. When you lease a new car, you pay for the depreciation over the lease term, plus fees and interest. There is often an amount due at signing, then the balance of costs is paid in a series of monthly lease payments over the duration of the contract. Despite the simplicity of the concept, leasing a car is a complex transaction with its vocabulary and a potentially confusing number array.
Buying And Financing
Using cash, financing, the value of your trade-in or a combination of all three, you pay the entire negotiated price of the vehicle when you buy a car. For example, when you buy a $30,000 SUV, you've got to pay $30,000. Usually, a down payment, your trade-in, and an auto loan are involved in spending that amount.
The lender holds the title until you pay off the financing if you purchase and finance a car, then you will own the vehicle free and clear. Many Americans love to buy their cars rather than leasing, as its one of the most popular transparent ways to purchase a car.
Financing a vehicle involves receiving a lender's car loan, such as a bank, credit union, or finance company. In a series of equal monthly loan payments, you pay down the amount of the loan (it's principal) and the interest. The length of an auto loan is called its term, and the terms of the loan vary frequently from a few years to seven or eight years.
What Are The Benefits Of Leasing A Car?
Leasing a car comes with many benefits over purchasing a car. We’ll look at a couple of examples of the benefits when leasing a car.
Lower Monthly Payments
Because you pay for the depreciation that occurs during your lease term, monthly payments with a lease are nearly always lower than when you buy a car. Although it is never a good idea to base your decision solely on monthly lease payments, it is important to find a payment that fits into your monthly budget.
By leasing, you may be able to purchase a nicer car or offer a few additional options for the same monthly payments as if you were buying.
You need the newest car you can find to get the latest security and connectivity tech. The latest models are loaded with advanced safety features and state-of-the-art driver assistance technology such as automatic emergency braking, adaptive cruise control, lane support, and semi-autonomous driving systems. Advanced connectivity features, such as 4G LTE data connections and Android Auto and Apple CarPlay support, are now common in low-cost vehicles as well.
You can find a model with a better fuel economy than similar models from just a couple of years ago, depending on the vehicle you lease.
When your lease is up, you can simply drive the car to the dealership and leave after paying any final fees, along with any extra mileage or excess wear charges. Of course, many leasing customers are not going to walk away–they are going to drive off with a newly leased car. With leasing, you don't have to worry about selling or trading in your old car, or haggling about its value trading.
You will often have a lower down payment when you lease than if you buy. In fact, at signing, some leases do not require anything. Many experts advise you to negotiate as low as you can when you sign. If you pay upfront a huge amount and wreck the car from the dealership on the way home, all of your down payment money will be gone. Make a small down payment, and you will be less likely to lose that money.
What Are The Downsides of Leasing A Car?
Leasing a car isn’t the best option for everyone. Below are a couple of downsides to leasing a car that you should keep an eye out for.
When you lease a car, you're not the owner of it. It's like paying rent for an apartment instead of a home mortgage.
The vehicle is owned by the leasing company, which enables you to drive it as long as you fulfill your contract obligations. If the vehicle is totaled or stolen, it would be paid off to the leasing company for the value of the vehicle, and you would have to go to the lease or finance and the new car.
Leases come with strict mileage limits, and if you exceed those limits, they can be expensive. Typical excess mileage charges vary from 15 to over 30 cents per mile, depending on the car. For example, if the excess mileage charge is 25 cents per mile, it will cost you an extra $5 per day for a 20-mile round trip.
While lessors tell you how many miles you can drive each year, they don't check every year to make sure you're below the limit. The total permitted miles is the number of years multiplied by the number of permitted annual miles. That's the total you can't go beyond over the loan term.
The expected number of miles in the lease is priced. When you turn the vehicle in, if you're well below the mileage cap, you're paying a bunch of extra money for miles you haven't driven. By accurately estimating the number of miles you drive each year, you can avoid this pitfall. If you don't know how many miles you're driving every year, you're probably not the best lease candidate.
Restriction On Use
Many lease agreements have strict limitations on where and for what you can drive your car. For example, without your leasing company's written permission, you may not be able to take the car out of the country (although sometimes the same restriction applies to financed vehicles).
If you're planning to use a leased car for a ride-hailing company like Uber or Lyft, you'll need to think about several things. You're going to want to scrutinize your lease agreement to make sure it doesn't outright prevent business use. Driving for Uber or Lyft is likely to put a ton of miles on your car, so you're going to have to make sure you don't have mileage restrictions that make this use very expensive. Lastly, your car is likely to suffer accelerated wear and tear, which at the end of the lease can cost you a lot of money.
Bottom line: If you plan to use a leased vehicle for anything other than routine driving, please check with your leasing company to make sure that such use is permitted.
The Changing System
A variety of converging trends have changed the average consumer's leasing system. A large proportion of luxury cars have been leased for decades now. Yet, with more compact cars, traditional sedans, and small SUVs now entering the new car lease market, that has changed. Attractive financing rates have made very good deals for some leases. Automakers benefit by leasing a large part of the production of a car. Leases help to maintain a steady supply of used vehicles, which in turn increases resale values. A high resale value means that a vehicle is slower to depreciate, resulting in cheaper leases for the model, which is good for consumers.
Also, when customers return their car at lease-end, they will personally bring those customers into the dealership. This is where the dealer has the opportunity to move them into a new car that needs a customer off-lease soon. The low-interest rates that have prevailed elsewhere over the past couple of years have moved into lease contracts, which also helps to moderate their costs. Interest rates are a critical part of the leasing economy because a lease is just another way of financing a car at the end of the day.
In some new leases, the low mileage allowance represents another tactic for boosting the resale value of a car: 10,000 miles per year instead of the usual 12,000 to 15,000 miles. To people who don't drive much, that may be perfect, but the average driver should exceed that amount every year. We also see an increasing number of less than 36-month leases, which is a mixed blessing. Sure, to somebody who doesn't want to be locked into a long contract looks good. But the first two years of a car usually represent the steepest portion of the depreciation curve, making it expensive to lease. In the car-loan market, however, it is becoming popular for consumers to stretch the loan for seven or eight years, simply to keep the monthly payment under control. Some of those people would be better off leasing.