Leasing Demystified
Lease or Buy? How do I know which is right?
Leasing can be a great thing. After all, on its surface a lease means a lower monthly payment and the chance to drive a new car every 2, 3, or 4 years depending upon your lease term.
Sometimes leasing makes more sense than buying – even for cash buyers, depending on the prevailing interest rates. Leasing can also be a great way to move up to one of the luxury categories. In other cases, leasing is definitely not the way to go. Knowing where your circumstances fall on the scale can make a major difference in the overall cost of your new vehicle.
Even though about a third of all new vehicle transactions are leases these days, not that many people understand how a lease actually works. So, here are the terms used and a simple example of how the finances work:
Glossary of Lease Terms:
MSRP – Manufacturer’s suggest retail price
Residual Value – The value of the car after the lease term
Cap Cost Reduction – Your downpayment
Acquisition Fee – Finding the car (Don’t accept this fee)
Security Deposit – One month’s payment in escrow. Most companies waive it.
Mileage Penalty – A lease has an annual cap of 10k,12k, or 15k miles, and you pay per mile over that cap.
Excess Wear and Tear – Leasing companies allow for normal dings and scrapes.
Anything beyond is your responsibility
The Dollars and Sense of Leasing
|
MSRP
|
$22,000 (Average Camry LE) |
|
Residual Value
|
13,000 |
|
|
9,000 |
|
Cap Cost Reduction
|
2,000 |
|
Lease Amount
|
7,000 |
|
Tax, Title, Fees, Security Deposit
|
1,300 (Estimated with 7% tax) |
|
TOTAL LEASE AMOUNT
|
8,300 |
Monthly Payment on a 36-Month Lease = $230.55
Note: You can reduce your monthly payment by adding to your downpayment
Basically, you’re paying for the half of the vehicle you’re going to be using. Simple, isn’t it? It wasn’t always so. There were things like Gap Insurance that would pay the difference between what was owed and what the vehicle was worth in the event of a total loss. There were onerous documentation and other fees, too. But over the course of the past 10-15 years, most states have admirably cleaned up the leasing business.
So, on to how you decide if leasing is right for you.
Leasing Advantages:
- Lower monthly payments
- Frequently a lower downpayment
- Fewer liabilities in maintenance and repair
- Worry-free walk-away after the lease term
- An easier tax model to work with if you operate a small business
- Lower possibility of making a mistake – it’s not your car for the long run.
Leasing Disadvantages:
- Mileage Penalties. Frequently people will underestimate their annual miles and get socked with a hefty bill over over-miles at lease end
- Excess Wear and Tear. What is excess? A major gray area, that’s what.
- You’re driving someone else’s car, and you have nothing to show for your monthly payments – except transportation.
- No business deprication
So, again – who should lease and who shouldn’t? Let’s say you’re an average couple with average commutes. And let’s say one of you drives to the train station and drives normally on the weekend. Your second car could well be a leased vehicle with an annual mileage cap of 10k or 12k. Ideal! Leasing could be a great way to go.
What if you’re the out-and-about family with freeway commutes. Leasing might be attractive for the payment, but if you do a lot of driving it begets a lot of miles and a lot more opportunity for excess wear and tear. Approach the lease cautiously!
Small business owner? We think: ideal! The monthly payment, taxes, title, plates, gas, etc. are a straight business write-off. While you won’t be able to figure in depreciation, you’ll be ahead of the game in reduced calculation hassles.
Just starting out in your very first new car? Another good candidate for leasing. You’ll have a payment you can afford more easily, and you won’t be socked with a major downpayment. But a caution: be realistic about how you intend to use your new vehicle. Those extra costs and wipe out the advantages in the end.
So, there you are. Leasing demystified. It’s one more in the increasing number of good financial tools that can be used in securing a new vehicle. And your best bet, once you’ve decided it’s right for you, is to stick with the factory programs. They’re the most up-front and the most precise about defining excess wear and tear.