Car leasing gets a bad rep for a number of reasons. I’ll discuss the main arguments below. But, like any modernized option, it’s here because it makes absolute sense for millions of Americans.
First, let’s start with the most important issue causing leasing to get a bad rep; finances. I’ll create an example to help clarify. Let’s start with a brand new 2018 Volvo S60 because they are extraordinarily safe, getting top honors from Kelly Blue Book for sedans, and where this example is going, we’re going to be happy and safe. The Volvo S60 has a starting MSRP of $34,000.
Let’s say you lease the Volvo. It holds its value well and will be worth around $26,000 after a 2-year lease (a normal amount of time for a car lease). With a reasonable down payment of $1000 and a good low-interest rate of 2.5%, the payments will be around $350/mo. I haven’t added the sales tax because that can change drastically, and I’m assuming good credit here. TOTAL AFTER 2 YEARS: $9,400.
Now, let’s say you finance (make payments on a loan for) the same vehicle. Normally, consumers pay around 20% of the car’s value as a down payment which would be $6,800 in this example. Additionally, assuming an interest rate of 2.5%, payments will be around $480/mo without sales tax. TOTAL AFTER 2 YEARS: $18,320.
Clearly, for the duration of the 2-year lease, leasing is far better on your wallet. In fact, leasing is almost $9,000 less. Obviously, when you finance a vehicle, you can sell it at the end. However, if you plan to trade-in your vehicle every 2 to 3 years, leasing is a much more financially wise investment. Additionally, the $9,000 can be used in other investments or pressing needs, which is an ideal situation for many students or new families.
So why the bad rap?
One reason leasing is believed to be the less prudent option is because those who believe that are comparing it to purchasing for long-term vehicle ownership. In the long-term (at least 6-8 years), purchasing/financing a new vehicle is financially sound. Unfortunately, owning a vehicle for that long will undoubtedly include maintenance costs that would otherwise be covered under warranty in a lease.
Plus, most of us will upgrade our vehicles well before the years where that purchase starts to make financial sense. And committing up tens of thousands in a vehicle for that many years presents an enormous cost of capital dilemma any good adviser would caution against.
A second reason (and less logical one) is the stigma of driving a vehicle you do not own. This is a mindset many pre-baby-boomers do not share, but it is still causing some groups to purchase – whether they plan to keep the car long or not.
So, as noted above, there are specific situations in which leasing is a smarter financial decision. Just think about why you need a car and if you want to have money tied up in a vehicle for long-term or have more money to use elsewhere in the short term.
Some common leasing mistakes
Leasing is a specific contract that, once made, doesn’t allow for a lot of wiggle room and can cause lessees to pay far more than they should during the lease term.
Here are some of those mistakes:
- Forgetting gap insurance: Gap insurance covers the difference between the car’s worth and how much is owed, which can change due to an accident.
- Underestimating mileage: It’s important to be reasonable with how many miles you actually drive in a year, otherwise, it can be costly.
- Not leasing a vehicle that holds its value: Leasing is essentially paying for the depreciation of the vehicle. A Volvo holds its value much better than a Kia Sedona and can actually have a lower monthly payment.
- Leasing for too long: It’s important to lease for the duration of the warranty. Nobody wants to pay for large repairs on a car they don’t even own.
- Spending multiple days dealership hoping: Just like everything else in the world, do it online! It will be much less stressful.
- Not maintaining or fixing the vehicle: Lessees will pay almost double standard repair rates for any neglected maintenance upon return to the dealership. So get your repairs done before you turn your lease in – just like you would if you owned your car.
- Paying too much for the down payment: It’s too risky to pay a large down payment. Stick to anything under $2,000.
- Backing out of the lease early: Breaking a contract is very expensive.
So to recap, there are some common mistakes people make when they choose to lease their next car. Depending on your lifestyle and needs, leasing may not be the best long-term option. Further, some deem leasing ‘financially unwise’ because your payments are not meant to pay off principal (only depreciation) and therefore you are merely renting the car with the option to buy it at the end of the term.
However, if you are like me and your vehicle needs will be evolving with your tastes, lifestyle, location, family… leasing is a fantastic alternative to financing. Leasing is like demoing a car – give it a try. If you don’t like it, send it back. If you love it, buy this one or the newer model later…
Leasing is like demoing a car – give it a try. If you don’t like it, send it back. If you love it, buy this one or the newer model later…
If you would like leasing experts to show you how leasing can be an amazing experience, email us today: firstname.lastname@example.org
Here’s what Carlease clients say about our leasing services:
“Phenomenal service. I’m never wasting another moment on a car lot again!”
“Great customer service!”
“Ordered exactly the car I wanted. Scott answered all my questions throughout the process. Couldn’t have gone smoother!”
“Simple, easy, stressfree, professional experience. Plan to get all future cars via Carlease.”