Should You Lease Your Next Car?

With the average price of a new car hitting an all-time high of $34,077 in 2016 and car loan interest rates expected to climb in 2017, Americans are now paying about $506 a month on a new car loan. Is it time for you to consider leasing your next car instead of buying it?

The number of vehicles leased rather than purchased doubled in the last five years. In fact, more vehicles were leased in the first six months of 2016 than during any other full year in history. Millennials leased 34.2 percent of their new vehicles while seniors leased 32 percent of theirs.

Leasing Versus Buying

The major difference between buying and leasing is that ultimately you own your vehicle when you buy it, but you never own it when you lease it. Instead, you “borrow” it from the leasing company for a specified length of time, usually two to four years. You return the car at the end of the lease period. You are responsible for the gas, oil changes, and routine maintenance while the car is in your possession.

Upfront Costs

One of the major advantages to leasing is that your initial costs are less than when you buy. Why? Leases seldom require a large down payment or high trade-in. In addition, you don’t have to pay sales taxes. Typical upfront lease costs include the first month’s payment, a refundable security deposit, a down payment, registration, and other fees.

A good FICO score is essential if you want to get the best lease deal. Car manufacturers and leasing companies often offer specials at the end of the model year; such specials, however, are only available to those with high credit scores. Nevertheless, if yours isn’t spectacular, you still may be able to lease one of the specials if you negotiate other lease terms such as offering to make a larger down payment or accept a lower annual mileage allowance.

Just because most leasing companies don’t require a trade-in doesn’t mean that you can’t negotiate this point. Be sure you know how much your car is actually worth before you attempt to bargain. Get an appraisal (some places such as Carmax offer them for free) and take it with you. If the lease dealer offers you less for a trade-in, show him your appraisal and ask him to match it.

Monthly Payments

Your monthly payment also will be lower when you lease. That’s because the loan value of a purchased car is based on its full price. When you lease, the loan value is based on the car’s depreciation during the time you have it. In other words, you’re financing the difference between the car’s initial price and its expected value at the end of the lease. This is called its residual value and is predetermined by the leasing company.

Lease loans do not use an annual percentage rate (APR) when calculating your monthly payment. Instead, they use a “money factor,” sometimes referred to as a “lease factor,” to compute your interest rate. If you want to know how your money factor translates to an APR, ask your dealer for it and multiply by 2,400.

Other Considerations

Another bonus of leasing is that if you use the car for 100 per cent business purposes, the IRS gives you the choice of writing off either your total annual lease payment amount or your mileage allowance, 53.5 cents per mile in 2017, whichever is greater.

Even with all the benefits to leasing, there are two possible down sides that may or may not be important to you depending on your lifestyle and driving habits. Most leases severely limit the number of miles you can drive, usually 10,000 to 12,000 a year. If you go over, you will pay a penalty, often as high as 25 cents per mile.

In addition, you are expected to return the car in its original condition, less normal wear and tear, at the end of the lease period. If you smoke or have young children or pets who often ride in your car and might cause excessive damage, such as upholstery burns, tears, or stains, you will have to repair these before turning in the car or face stiff penalties.

Overall, leasing is an attractive option for many people. Whether it’s your best option requires thoughtful analysis.

Tom Brown
Tom Brown is an automotive market enthusiast living in the United States. He holds a diverse background in automotive marketing and enjoys utilizing that to produce insights into the inner workings of the industry.