MONEY TALKS - Last week I had an interesting conversation with a local automotive retailer in town. Our discussion centered on the benefits of leasing and which customers were good leasing candidates. At first I was cynical, but the more I listened the greater appreciation I had for the flexibility that leasing affords you. Leasing is not for everyone; however, there are some compelling reasons why you should consider leasing your next car.
1. Cheaper Monthly Payment - With a traditional auto loan, your payments are based on the entire cost of the vehicle. For example, if you purchased a $27,000 vehicle and secured a 36 month loan, the principle portion of your payment would average $750 per month. However, when you lease a vehicle, the principle portion of the lease is not based on the value of the car. In a lease, the principle payment is based on the vehicle’s decline in value, or depreciation, during the term. So if that same $27,000 car is expected to depreciate $9,000 over the first 36 months, the principle lease payment would only be $250 per month.
2. Less Tax Due - When you purchase a new car, the state sales tax due is based on the purchase price. Going back to our previous example, a $27,000 vehicle would generate a tax bill of nearly $1,700. In contrast, when you lease a vehicle, the sales tax is based not on the sales price, but on the total monthly payment (principle + interest). If we assume a 4% interest rate, the total lease payment would be about $325/month. This means that the tax due on the lease would only be about $20 per month. The beauty with leasing is you can amortize the tax payments over 36 months as opposed to purchasing, where you need to pay the entire tax bill upfront.
3. Predetermined Residual Value - When you purchase a new car it’s often difficult, if not impossible, to predict what the resale value will be down the road. When you are ready to trade in or sell the vehicle, whether it’s two, three, or ten years from now, there are many variables out of your control such as the manufacturer reputation and market demand that can affect the worth of your vehicle. With a close-end lease, as most auto leases are, the residual, or future value is predicted up front and put in writing on the contract. At the end of your lease, if the car is worth less than the agreed upon residual value, simply hand over the keys and walk away. Conversely, if the car is worth more at the end of the lease then you have the option to buy the car at the lower residual value or negotiate that positive equity into a new lease.
4. Manufacturer Warranties - Most standard manufacturer bumper-to-bumper warranties cover 3 years or 36,000 miles, whichever comes first. Coincidentally, many leases have a term of 36 months. This means, in most scenarios, the car will be covered under warranty during the duration of the lease. This could save you thousands of dollars in repairs over the course of the lease. Not to mention the peace of mind from not worrying about an unexpected repair bill hitting your checkbook right before the holidays.
5. Safety & Technology - Now more than ever, the automotive industry is being scrutinized and held to higher safety standards. By leasing a new car every few years, you are guaranteeing that you and your family are protected by the latest and greatest safety features such as collision avoidance, lane departure warnings, and drowsy driving warnings. Likewise, if you enjoy having the newest high-tech features such as advanced parking guidance, adaptive cruise control, and GPS-linked temperature control, then leasing is worth considering.
As with most things in life, one size does not fit all. While the attraction of driving a new car with a low payment can be compelling, there are some disadvantages to leasing that you should be aware of before you drive off the lot. Unlike a traditional auto loan where your monthly payment eventually ceases, once you’re in the leasing habit, your payments last forever. Another area to pay attention to is your mileage allotment. Most leases have a limited amount of miles you can drive, typically 10,000 to 15,000 per year. If you exceed your allotted mileage you are charged a steep penalty that can be as much as 25 cents per mile. Lastly, be sure to keep in mind that even though you don’t own the car you are still responsible for the maintenance including oil changes, tire rotations, and manufacturer recommended care. Failure to properly maintain the car during the lease could result in excess wear-and-tear charges when you turn the car in.
Clearly there are pro’s and con’s to leasing that should be considered before you sign on the dotted line. Each one of us has a unique set of circumstances that may make one option more advantageous than the other. However if you like the idea of trading up every few years for a new reliable car while enjoying a low monthly payment, then leasing might be worth considering.