Leasing a Car

Leasing a car is awesome and confusing all at the same time for most of car buyers.  Either that or hated with a passion!  There are many people out there like financial adviser Dave Ramsey who see leases as nothing but money leaving your pocket to the dealers/auto makers.  There are also people who do nothing but lease (and are moderately financially savy!) as well though so whats the deal?  If you want a quick Finance vs Lease comparison, read this article first.

I’ll be the first to say that I lease.  Not my car, it’s 45 years old and is very paid off!  However my wife’s car/the family car is and has been a lease for 4 cars now.  I’ll start of with the benefits of leasing…

The Benefits of Leasing a New Car

  1. Low payments – Leasing gives us an avenue to get that newer, nicer car without having to come up with a massive down payment.
  2. Flexibility – If you’re either one of those who like having a newer car every few years, or if you’re in a situation in life where things might be changing (newlywed, college grad, etc) then leasing will actually save you a good chunk of money by not being stuck with all of the depreciation and up-front sales tax.
  3. Warranty – Most leases are around 3 years, most warranties are around three years.  Coincidence?  If having a payment is better than having to worry about maintenance and repairs on an out-of-warranty vehicle, leasing gives you great peace of mind.
  4. Tax benefits – Not only do you only pay sales tax on the payments instead of the whole purchase price, leasing for businesses or the self-employed is great because on a lease you can write off the entire amount as a business expense.  You’re not as limited as you are on a purchase.  Check with your tax professional though, different states may vary.

The Downside of Leasing

The downside of leasing is that there are limitations on miles, and as you can expect for someone with a car coming back to them, the manufacturer is going to inspect the leased car upon its return at the end of the lease.

The mileage limitations are part of the residual value.  Of course a lower mileage car will have depreciated less than a high-mileage one, so you’ll have a higher residual value (= Lower monthly lease payment) if you get a 10,000 mile per year lease, than if you have a 15,000 mile per year lease.  Standard plans for most manufacturers are 10, 12, and 15,000 miles per year, though some offer lower or higher options as well.  If you bring your car back with more than the allowed mileage, you have to pay a set fee, usually around twenty cents per mile.  Only go a couple thousand miles over and that’s a $400 charge.  If you really get carried away though, those charges can add up, especially if there’s an issue with the inspection as well.

Again, with a used car coming back, the leasing company wants to make sure you didn’t trash the car, thus negatively affecting the residual value of the car.  This is called “Excess Wear and Tear”.  Anything beyond what the manufacturer deems “normal” wear and tear gets billed to you at the end of the lease.  I’ve seen these range from $25 up to over $5000!  That five grand of course is an extremely rare case, but don’t bring the car back with bald tires, no front bumper and four scraped wheels that need replacing, along with torn upholstery and a cracked windshield and you’ll be fine.

I’ve leased 4 cars now and have yet to be charged for excess wear and tear, as do most who choose to lease.  However, these two situations can create an issue of you’re not aware of them in advance to choosing to lease.  If you go into the lease with all your homework done in advance, and you car buying checklist in hand, you can be confident that leasing is the best choice for you.

How Leasing Works

Leasing a car is based primarily off of the Depreciation of the new car.  For example, if a $30,000 car has a residual of 50% for a 36 month term, you pay off the first $15,000 over the 36 months.  Its not interest-free.  Some companies like Ford use traditional interest rates, while many such as Volkswagen use whats called a money factor.  Instead of a 2.9%, its a number like 0.00120.  Learn all about calculating a lease here.  The Total amount or “Capitalized Cost” will include the balance before the residual, plus dmv fees, acquisition fee, document fee, or any other added costs.

If all this has just made you more confused, I apologize.  My last-ditch effort to explain leases is this.  A lease is an extended-term finance with an opt-out in the middle.  You pay down the depreciation of the car for the lease term, and have the choice to keep the car and buy it out for the remaining residual value, or you can give the car back to the leasing company.

All in all, leasing is a great option for many of us and it may be a great option for you!

Do you have any questions I havent answered here?  Please contact me and let me know and I’m happy to answer those leasing questions for you!

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