Ready for a new car? If so, you’re likely asking yourself what type of car you want, whether to upgrade to a larger ride and which color you prefer.
But here’s another question: Should you buy or lease?
Most people finance their vehicles or pay in cash, but leasing has some benefits too. How do you decide?
What does leasing really cost?
Leasing typically has lower monthly payments than buying, which is its greatest appeal. But to get the best deal — and to keep the most money in your pocket — you need to calculate the actual cost overall for both buying and leasing.
Here’s an example: Say you find a car with a $30,000 purchase price that you plan to buy rather than lease. You finance the purchase at 3 percent for 36 months with a $1,000 cash down payment. Assuming you don’t have a trade-in, your monthly payment would be $872 and you’d pay $31,392 overall.
In 36 months, you decide you don’t want the car anymore. If you financed, you could sell the car for its current value – say, $18,000. So owning the car for three years has now cost you $13,392.
Now, let’s see what happens when you lease the same car for 36 months with $1,000 down. Assuming a monthly payment of $500, you’d pay $19,000 overall.
But if you lease the car, you can’t sell it. So, your total cost is still $19,000 — thus making it much less expensive to purchase the car.
This is a simple example that doesn’t take into account several other factors, including sales tax and the upfront fee to lease the car. But it still gives you a pretty good idea which move makes more sense financially.
Leasing comes with some other higher out-of-pocket costs and potential fees:
- Mileage limit. Leases come with a limit on the number of miles you can drive the car — often 15,000 miles a year. Exceed that limit and you’ll pay a large per-mile penalty when you turn the car in.
- Early termination penalty. Getting out of a lease early will cost you a penalty — generally the remainder of what you owe on the lease. However, you might be able to transfer the lease to someone else. To accomplish that, check out sites like LeaseTrader.com and Swapalease. Just know that you’ll pay a fee, and the company leasing you the car will have to approve the transfer.
When leasing might be right for you
Despite the drawbacks, leasing might be a better option if you:
- Want to drive a new car every two or three years.
- Need a car for a limited amount of time.
- Need a new car for your business but simply can’t afford the higher payments to finance one.
Things to be aware of when negotiating a lease include:
- The capitalized cost of the car. That’s the price of the car plus the acquisition fee, and it is negotiable. Just as you wouldn’t pay the full sticker price when buying a car, you should haggle for a lower capitalized cost of a leased car.
- The “money factor.” That’s the interest or lease rate calculated into your monthly payment. It also is negotiable, so shop for the lowest rate.
- The residual value. That’s what the car should be worth when the lease ends. The residual value subtracted from the capitalized cost will determine the cost of your lease. A lower depreciation rate will mean a higher residual value and lower monthly lease rate.
- Fees and more fees. There can be many — for example, the price of excess mileage and excess wear and tear — so you need to read the contract carefully before you sign.
Which do you prefer — buying or leasing a car? Let us know in comments below or on our Facebook page.
Karen Datko contributed to this post.