By Nathaniel Sillin
According to Edmunds.com, more than 25 percent of new American cars are now financed by lease instead of loan, and most of the people making that choice are under age 35.
It’s all about the lowest possible monthly payment.
Yet for drivers young and old, leasing has grown substantially because it can also be done with little or no money down and the chance to get a newer, better car for less money overall.
The main disadvantage? You won’t own the car unless you buy it at the end of the lease, which may or may not be a good deal.
Experian Automotive – a division of the major credit reporting service – reported in mid-2015 a nearly $100-a-month savings for those who lease cars versus those who buy their cars by loan. Their numbers showed the average monthly payment for a brand-new leased vehicle was $394 a month against $483 for a new vehicle purchased by loan.
So would leasing be a good deal for you? Don’t decide without research, qualified advice and a thorough look at your finances. Start with the major pros and cons:
Pros: Lower down payments and monthly payments than required with a conventional auto loan; low repair costs thanks to factory warranties typically tied to the term of the lease (usually three years); easy drop-off or trade-in once the lease expires; and lower sales tax expense because the lease is based on only three or four years of use.
Cons: You’re essentially renting a car, not buying it – payments are cheaper because you’re really only paying interest and depreciation expense and not receiving any equity in the vehicle; annual mileage caps (usually 12,000-15,000 miles) come with stiff penalties if you exceed those limits; and potentially steep fees for excessive wear-and-tear on the car or early termination of the lease.
Pros: Freedom to put as much or as little mileage, wear-and-tear and modification on the vehicle as you choose; long-term (100,000 miles or over) car ownership with good maintenance can be much more economical long term; and because you own the car, you can sell at any time.
Cons: You’ll generally require a higher down payment than a lease; monthly loan payments are generally higher because unlike leasing, you’ll be taking ownership of the car once it’s paid off;; once factory warranties expire, you’ll take on full maintenance costs for an aging car that may or may not be expensive; and you’ll have more cash tied up in a depreciating asset for as long as you own the car.
All these positives and negatives aside, it’s important to know that with loans and leases most details are negotiable, so it’s important to do your research. Start by estimating how much car you can actually afford (http://www.practicalmoneyskills.com/HowMuchCarCanYouAfford) and seek out qualified financial and tax advice to shape how you’ll approach the best possible deal for your financial situation.
For many, leasing requires more extensive study because this form of financing is relatively new to most drivers and the terminology (http://www.cars.com/advice/) can be daunting. But generally, the best deals depend on two major factors – negotiating the lowest price on the vehicle going in and making sure it’s a vehicle that has a high estimated post-lease value. In short, the lessor’s ability to keep making money on a high-value leased vehicle allows a lower monthly payment at the start.
Bottom line: If you need a vehicle, it pays to evaluate whether lease or purchase makes the most sense for you. Know your needs and get advice so you can make the most affordable choice for you.
Nathaniel Sillin directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney.