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Saving Strategies: Buying vs. Leasing a Car
With the sticker price of many automobiles now
exceeding $25,000, more and more Americans are considering leasing as a viable
financing alternative. In general, leasing a new car will end up costing you
more over time than buying one. So why do so many people lease cars? Leasing
can result in a lower initial cash outlay and lower monthly payments than a
typical new car purchase. Through leasing, drivers can enjoy more car for their
cash. The potential cost of that luxury, however, can be high.
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How a Lease Works
The cost of the lease will depend on the sales price of the car, the interest rate, the lease period, and whether the lease is closed- or open-ended. With an open-end lease, you enjoy unlimited miles, but if the resale value of the car at the end of the lease is less than the agreed-to amount, you must make up the difference. A closed-end lease imposes a mileage limit, usually 12,000 to 15,000 miles a year. If you average more than this, you'll have to pay a per-mile surcharge (typically 8 to 15 cents a mile) at the end of the lease.
The terms and conditions of the lease typically hold you responsible for the care and condition of the car. Most leases require some initial down payment, but the actual amount will vary from dealer to dealer and car to car. To see how a lease can lower your cash outlay, consider the following example: You have $2,000 in cash and your heart is set on a car stickered at $35,000. Buying the car with such a low down payment would mean monthly payments of more than $775 for four years, assuming an annual percentage rate (APR) of 6%. With a lease, however, your monthly payments could fall to just $516, assuming a 40% residual value and 6% APR.
Other factors that affect the monthly payment are
the vehicle sticker price and, for an open-end lease, the expected vehicle resale
value. It is a good idea to negotiate the car price before asking for a lease.
The higher the price, the higher the lease cost. A higher resale value will
lower your lease cost, but you may end up with a large termination fee if the
resale value is unrealistic.
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Single-Payment Leases
Paying the entire lease amount in a single up-front
payment can save you significantly on lease payments. The up-front payment reduces
default risk and administrative costs, allowing the lessor to pass the cost
savings along. Before choosing a single-payment lease, however, consider the
potential opportunity cost of losing the use of that money in the interim. Single-payment
leases are typically preferred by those leasing premium cars and who travel
frequently between residences in several cities. For these individuals, making
regular monthly payments on time may simply be too inconvenient.
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Is a Lease Right for You?
When you lease a car, you pay only for that portion of the car that you use -- in other words, if you want it for two years, you'll pay only for two years' worth, without then having to resell the car or trade it in. If short-term use is your goal, a lease may make the most sense. However, if you will always need a car, but it doesn't have to be a new car, a lease is an expensive option.
At the end of the lease term, you'll have to replace the car with another lease, and another series of payments. When you purchase a car, you own it long after the monthly payments end.
If savings is a priority over convenience, and you absolutely must have a car but can't afford a new one, consider purchasing a used car rather than leasing a new one. While you won't have the new-car luxury, the purchase price -- and your down-payment -- will be substantially lower. And if you buy a car under six years old, you'll be able to stretch out payments over three to four years. If you buy the car from a dealer, you may also be able to purchase an extended warranty that will cover major repairs for several years, giving you some protection against buying a "lemon."
If you must have a new car, and leasing is the
only way you can afford it, don't lease as much car as you possibly can. Shop
around for the best interest rate. Although some dealers will not disclose the
factors they use to arrive at the lease price, there are tools available that
you can use to discover these variables.
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Summary
- A lease will cost you more than purchasing a car.
- A lease will typically result in a lower initial cash outlay and lower monthly payments. But at the end of the lease, you don't own the car.
- An open-end lease allows you unlimited miles, but you must make up the difference between the agreed-upon resale value and the actual value when the lease is terminated.
- A closed-end lease imposes a mileage limit. If you drive over this amount, you will pay a per-mile surcharge.
- Paying the entire lease price upfront can save you significantly on lease payments.
Checklist
- Ask each auto dealer you visit to provide written details regarding prices, warranties, financing arrangements, etc.
- Check the Blue Book value of any vehicle you are considering to make sure you'll be paying a fair price.
- If you already own a vehicle, decide whether to sell it yourself or offer it to a dealer as a trade-in.
- Don't let an auto dealer convince you to spend more for a car you don't need.
