Leasing a vehicle has been a popular alternative to making a purchase for some time, but it may not be the most cost effective method of acquiring your next car or truck. Compare costs, including acquisition, insurance and maintenance over the entire period you will have the car. This is not always easy because the terminology of leasing can be confusing.
Leasing versus Buying
When you lease a car, you are financing that portion of the car's value that you are using. Focus on three factors when determining the final cost of a lease. First is the purchase price of the vehicle, second, the "residual value" or that amount that they determine the car to be worth at the end of the lease, and finally the interest rate that you are charged to finance the vehicle. Know that your payment goes strictly to financing and you accumulate no equity. When you purchase a car, you finance the entire purchase price of the vehicle and accumulate some equity, even though the amount decreases with time. Generally, the longer you lease your vehicle the more expensive it is versus buying outright. A lease of three years in often the break even point and anything longer leans toward a purchase as the better alternative. Of course a dealer incentive, such as cash back or a low interest rate, could make the purchase a better deal from the start. A third and cheaper alternative to buying or leasing a new car is to purchase a used car. Even purchasing a vehicle that is only a year old can be less expensive than the new car alternatives.
Additional Lease Costs
The ultimate cost of your lease will depend upon how many miles you drive each year. At the outset of your lease, you negotiate a set number of miles, usually between 12,000 to 15,000 miles per year, that you are allowed to drive. You pay a premium of 5 to 20 cents per mile for anything over your total limit. This additional charge can add up quickly. Check with your state, because lemon laws may not apply to your leased vehicle. Insurance rates are sometimes higher on leased vehicles. When you turn in your car, you may be charged for repairs to dents and deep scratches, and if all four tires are not a match, you will be charged the cost of a new, matching replacement.
Exiting Your Lease
You have two choices at the end of your lease. You can either settle the final bill and walk away or you can purchase the car at a predetermined price. The predetermined price is often higher than you might pay for a similar vehicle if you were to bargain from scratch. It is almost always more expensive to purchase your leased vehicle than to buy it from the outset.
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