Time for a new car?
Will you lease or buy?
Most people understand how buying a car works. Leasing, however, is a bit more complicated.
Leasing, rather than owning a car, makes sense for some consumers. For example, college graduates who need a new car before starting their first job might not have enough cash to make a down payment to purchase a car.
Also, some drivers need or want a new car every few years. For these drivers, leasing also is the best option.
Or, if you want to drive a fancier car than you could afford to buy, leasing is the way to go.
Just keep in mind that if lease and never buy, you basically always have a car payment. On the flip side, of course, you also are always driving a car that is under warranty, which cuts down on your car repair costs.
But all consumers must understand how leasing works.
First think of it this way. When you lease a car, you essentially are paying for a portion of the car — the difference between what it’s worth when you lease it new, which is called the capitalized or “cap” cost, and it’s estimated value at the end of the lease agreement, which is called the residual value.
So, say you want to lease a $30,000 sport utility vehicle for two years. Let’s assume the dealer estimates the SUV will be worth $20,000 in two years. That dealer will then lease you the SUV for $10,000 plus interest or fees.
Leasing requires less cash upfront than buying a car. Typically, all it takes to drive a leased car off the lot is one month’s lease payment and one month’s security deposit. Also, keep in mind you still have to carry auto insurance on a leased vehicle.
If you can afford to make a larger down payment — called capitalized reduction in lease agreements — than this then you might want to think about buying a car.
Go for a close-end lease. This gives you the right to purchase the car for its residual value plus some fees at the end of the lease, but you are not obligated to do so.
Open-end leases are a bad idea. Basically, if at the end of your open-end lease the value of your car is worth less than the estimated residual value, you have to pay the difference.
Another thing to keep in mind: mileage limits. Your lease will specify how many miles you can put on the car without penalty. Usually, the limit is 15,000 a year — or 30,000 for a two-year lease. You can choose a lower limit — say 12,000 — and lower your monthly payment. But be careful. Going over your mileage limit can cost you a bundle. You could end up paying as much as 25-cents a mile for every mile you are over your limit.
Turning your leased car in poor condition also can be costly. Your lease agreement will allow for what’s called normal wear and tear. That means the tires can be worn the amount they normally would be. Of course, if you are within your mileage limit this shouldn’t be a problem.
The carpet and upholstery can be worn. But you’ll pay for stains and cigarette burns. The same obviously goes for dings, scratches, and dents to the outside of the car.