The question for today’s topic: Is leasing a vehicle worth it? The really short answer is: perhaps! Let’s take a look.
How Leasing Works
Leasing is essentially a long-term borrowing situation from the dealership. A lease monthly payment is typically lower than if you were to purchase the same vehicle. To understand this, consider what a monthly vehicle payment is comprised of.
When you purchase a vehicle, you are financing the entire cost of the vehicle, minus your downpayment along with taxes, registration, fees, etc. When you lease a vehicle, you are simply financing the depreciation (along with taxes and fees) of the vehicle over the term of the lease, typically 3 years.
With a lease, the dealership determines up front what is known as the ‘residual value’ — the value of the vehicle at the end of the lease (provided that the vehicle is returned in the same type of condition it was in when it was driven off the lot, with the exception of normal wear and tear). The bottom line is, in a lease arrangement, the dealership is letting you drive a brand new car off the lot which will be returned in 2-3 years in worse condition with a lot more miles. Therefore, the person leasing has to at least cover the depreciation to make the deal worth it for the dealership.
Perhaps the car being leased sells for $20k new, but in 3 years with 45k miles the residual value of the car is projected at $12k. This means over the course of 3 years the individual leasing the vehicle should cover at least $8,000 for the dealer to break even.
Where leasing becomes not as advantageous is when you consider fees tacked on for surpassing the allotted mileage. A typical lease allows for 12,000 miles per year. If the individual leasing the vehicle goes over this mileage, penalties are often applied which can add up really quickly. 20 cents a mile may not sound like a lot, but if 36,000 miles are allowed and the vehicle is returned with 40,000 miles on the odometer, expect an $800 fee! Depending on the terms of your lease, there may also be fees for not performing regular maintenance, or returning the vehicle in less than acceptable shape. It is really important to read over the lease agreement and fully understand it before driving off the lot so you know how to meet their expectations and you aren’t stuck with large penalties at the end of the lease.
Is Leasing Right For Me?
When you purchase a vehicle, there comes a point where you have equity in the car. This can be years into the loan because, initially, depreciation cuts into the value of your vehicle really quickly in the early years. However, if you plan on owning the vehicle for 10+ years, there comes a point where the depreciation slows down, the interest portion of your loan payment decreases, and your equity in the vehicle increases. Individuals who purchase a vehicle have an asset whereas individuals who lease do not. Because of this reason, some see leasing as simply throwing money away.
To be clear, leasing is not for everyone. Typically, leasing is geared towards individuals who enjoy driving the newest vehicles with the newest technology. It is for people who do not have a long commute or do not plan on going over their allotted miles. It is for people who simply like having a low monthly payment and don’t want to worry about major repairs. They simply want to drive a newer vehicle and are willing to pay a premium for this privilege.
Make no mistake, a lease arrangement benefits the dealer financially. However, depending on your reason for purchasing or leasing a vehicle, your lifestyle and your financial situation, it might make sense to lease!