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Leasing a car

Life Events

A Brief Guide to Leasing a Car

2022-07-25

By now it’s pretty clear we are experiencing a car supply shortage. As supply increases, many will be tempted to acquire a new vehicle; a major financial decision, to be sure. Knowing the ins and outs of buying vs leasing a car will set you up for success when the time comes.

After owning a car for an extended period of time, typically three years or more, many people want to change their vehicle to a newer or different model. Often, this decision isn't as simple as it seems. Deciding to buy or lease that next set of wheels could prove to be a tough decision, one with considerable financial ramifications either way you go.

Whether to buy a new vehicle or lease one largely depends on a person's lifestyle and personal priorities. For some drivers, leasing (essentially renting) or buying a car depends on the overall cost, especially the cost on a monthly basis. For others, it’s an emotional attachment to the car itself. You can calculate and compare the price of both options, but before deciding which to opt for, you need to understand the major differences between the two.

We are going to take a look at buying vs. leasing, focusing particularly on the pros and cons of leasing.

Comparing Buying and Leasing

In simple terms, leasing a car involves renting it from the owner for a specific duration.

A typical lease is 36 or 48 months and the car is usually brand new. A written agreement specifies the time and terms of the lease. When this period is over, you'll be required to return the car to the dealer. However, you may have the option to purchase the car at an amount specified in the lease agreement, or negotiate the purchase price on the lot at the time of return.

When you buy a car, you purchase the vehicle outright from the owner. Depending on the agreement between you and the owner, ownership happens when the total of all payments are complete. If you borrow money, or finance the car, then ownership occurs when the loan is paid in full.

Lease Payments: How Do They Work?

After agreeing to lease a vehicle, you'll be subject to periodic payments. Periodic lease payments are usually less than the regular monthly loan payments to purchase a car. The amount of money you'll pay when buying a car on-loan will depend on the price of the vehicle, the loan interest rate, and the duration it will take to complete the loan.

On the other hand, lease payments depend on the following factors:

  • Sales price: In a similar manner to buying a car, the sales prices of the vehicle is negotiable with the dealer.
  • Length of the lease: This describes the duration you intend to lease the car.
  • Expected mileage: You should expect your dealer to put a limit on the number of miles you can drive your car until the lease expires. Most car leases come with a 12,000-mile annual mileage agreement. If you intend to pass this yearly mileage figure it will cost you extra money. If you cross the total mileage threshold, you'll be required to make additional payments at the end of your lease.
  • Residual value: The residual value of a vehicle refers to the car's value at the end of the lease. If you opt to purchase the car after the lease has expired, this is the sum you'll be charged.
  • Rent charge: Also referred to as the interest charge, this figure is expressed as a dollar figure and not a percentage.
  • Taxes and fees: The taxes charged on your lease will depend on the taxing policy for that region.

Advantages of Leasing

When you lease a car you make monthly payments for the privilege of using it, but you do not own the vehicle as the ownership rights do not transfer to you. For some, the concept of owning sits better than the concept of leasing. Before you decide, consider the following advantages of leasing:

  • Lower monthly payments: Unlike purchasing a car through a loan (which can be financially exhausting), leases are subject to lower monthly payments. For many, this means they can afford a more expensive or luxurious vehicle.
  • Great if you change your car frequently: If you're one of those people who prefers driving a new car every few years, a lease is an ideal option for you. When your lease is up for one car, you complete the terms of the agreement and move on to the next vehicle.
  • Free regular maintenance: The dealer will likely give you a warranty when leasing a new car. This will usually cover the cost of repairs for the duration of the lease and is a great way to avoid the high cost of car repair and maintenance.
  • No hassle for resale: If you don't like the idea of advertising and selling your car, leasing could be a good option to try out. With a lease, you never have to worry about selling it.

Disadvantages of Leasing

While leasing may seem like a dream scenario, there are a few drawbacks.

For starters, you’ll likely have to make a large lump-sum down payment to buy into the lease. This is in addition to the monthly payments you’ll make. For example, a dealer might offer a lease for $3,500 down and monthly payments of $350 a month for 36 months. That adds up to a hefty $16,100 by the time you’re done…and you don’t own anything after you drop the car at the dealer three years later. This brings up the second disadvantage, which is you aren't entitled to any equity in the vehicle - despite the monthly payments. And finally, if you want to terminate the lease early you’ll likely pay a cancellation fee.

For Your Consideration

Buying or leasing a car is a considerable financial decision and one that warrants careful consideration. Leasing or buying on-loan binds you to a long-term contract and mandatory payments. If you’re not sure which is right for you, ask a few people from both camps and hear what they have to say. You’ll learn a lot from their experiences and be better informed to make your own decision.

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