Time for a new car. The ads on TV touting low monthly leases are enticing, especially when you compare them to a monthly payment for a new car. But, is it really a good idea? As usual, the answer is, “It depends.”
One: Evaluate your transportation needs
First, you need to know how many miles you typically put on your car. Lease agreements limit the number of miles, often 12,000 or 15,000 annually. If you put on more miles, you will increase the cost of leasing, either by paying for additional miles up front or a hefty and painful fee at the end of the lease.
Then ask yourself what kind of driving do you do? If you are rough on a car, you could end up paying thousands of dollars for excessive wear and tear, which can be as simple of scratches and dents.
Notice I said transportation needs, not wants. Not that you can’t have what you want, just be honest with yourself. Leasing a car almost always costs more over the long run. Do you love the new car feeling? Is it worth never-ending payments?
Maybe the monthly payment for a car loan simply isn’t affordable. You need safe, reliable transportation to get to work, pick up the baby at daycare, drop off your daughter at soccer practice, and home to make dinner before bedtime. The reality of your life can dictate your choice.
Two: Understand the business transaction
Leasing is a complicated transaction, compared to buying. When you buy, you pick out a car, get a loan for ‘such and such’ interest, and make your 4 to 7 years of monthly payments. And you’re done. The car is yours to love and maintain until rust do you part.
In a leasing transaction, you are essentially paying for the estimated depreciation of the car—how much value will that car have lost by the end of the lease? And, that depends on where you are starting:
- What is the price of the car?
- How well does the make and model hold its value?
- How much is the Gap Insurance?
- If the car is totaled during the lease, your auto insurance will cover the damages, but you still have the contractual monthly lease payment. Gap insurance covers you in that event, which is an Early Termination of the lease agreement.
- Other add-ons, like additional miles or adding in the remaining balance of your current car loan?
- Any subtractions, like a down payment or trade in?
This adds up to the starting cost. The leasing company then subtracts the estimated value of the car at the end of the lease. The result is the amount you are financing. Just like buying a car, you have some negotiating power over the price of the car.
There are a number of other fees involved in the transaction: down payment, security deposit, early termination fees, and excessive mileage or wear and tear fees. Knowledge is power and you can learn more about the finer details of the leasing transaction searching on line. Click to read a handy resource from our beloved Attorney General’s office.
Three: Compare leasing vs. buying
Let’s say you buy a new car for $20,000 with no down payment at 6.5% sales tax on a 5 year loan. For $60 to $100/month more (depending your interest rate) than a lease payment, you can own the car outright after 24 more months of payments. Cars, can easily last 10 years (mine is 13 years old, no signs of giving up soon.) You have at least 5 years of NO PAYMENTS. Multiply $347 (estimated lease payment) by 60 and you’ve saved $20,820! And, if you really saved it, you could pay cash for your next car! Buying a certified pre-owned newer car can save you even more, with a monthly payment lower than a lease payment. Over the long run, buying is a better option financially.
Of course, cars break down and need parts replaced as they age, just like me. To be fair, we should factor in maintenance and repairs. Plus, the time and hassle of getting to the auto shop. In the end, that might be the tipping point in favor of leasing for you. For me, my child is grown (no daycare or soccer practice,) my auto shop is close to home, and I can get to work without a car. Your life may warrant the increased cost of leasing. It all depends!
Author Mary Ellen Kaluza is a Financial Counselor at LSS Financial Counseling. Call 888.577.2227 to meet with a financial counselor. We are here to help you get on track financially.