Are you in the market for a new car and wondering if a lease might make sense for you? Perhaps you’ve seen the commercials to lease a high-end car and the monthly payment seems doable despite the high cost of the vehicle. So what makes this possible, and will you really save money by leasing a car? Here are some factors to consider when it comes to leasing vs. buying a new car:
With a Lease You Are Paying the Vehicle’s Depreciation
Let’s say you are considering purchasing a new SUV with a $28,000 price tag. With a traditional car loan, you would pay back the $28,000 plus interest over a fixed amount of time usually 5 years. If your interest rate were 3%, your monthly payment would be $503 per month. This amount excludes a down payment and fees such as tax and registration fees.
With a lease, you are only paying to drive the vehicle for a set amount of time and then returning it to the car dealership. The monthly payment is determined by how much the car will depreciate over the time you are leasing it plus interest and fees.
Let’s say you lease the $28,000 SUV for 3 years. The dealership determines that in 3 years your SUV will be worth $18,000. That means that the vehicle will depreciate by $10,000. You will be responsible for paying back $10,000 plus interest, which is referred to as the money factor, over 3 years. If your interest rate were 3%, your monthly lease payment would be $362 per month. That is $141 per month less than the monthly payment on the traditional car loan. Again, we have excluded a down payment and tax and registration fees.
You’ll Always Have a Monthly Payment if You Lease
With a lease, your monthly car payment may be lower, but you’ll always have a monthly car payment. With a traditional loan, you pay more per month, but the payment eventually goes away. You then own your vehicle. You’ll be able to sell it and use the cash for the down payment on your next vehicle.
Consider the Restrictions and Fees Involved with a Lease
There are some fees and restrictions to keep in mind when you lease a car that you wouldn’t have to deal with if you were purchasing a car.
Most lease contracts include mileage restrictions, which means you can only drive a certain number of miles per year. The amount of miles you can drive usually ranges somewhere from 10,000 to 15,000 per year. If you go over this amount, you will have to pay an excessive mileage fee of around $0.10 to $0.25 per mile.
Fees for Excessive Wear & Tear
While most leases allow for “normal wear and tear” on a vehicle, your leased car will likely undergo an inspection when you turn it in, and you could be charged hundreds or sometimes even thousands for items considered to be excessive wear and tear. You’ll want to make sure you understand the lease terms carefully before you sign a lease contract.
Early Termination Fees
Getting out of a lease early isn’t easy. You’ll have to pay an early termination fee and the earlier you need to terminate a lease, the higher the fee. Then again, selling a vehicle you purchased recently isn’t easy either. You’ll usually end up owing more on your loan than the vehicle is worth in the first few years.
How Long do You Keep Your Vehicles
Determining whether or not you should lease your next vehicle usually comes down to how often you want a new car. If you keep your vehicles for a while or at least for a few years longer than it takes to pay them off, it likely makes sense to buy. If you like having a new vehicle every couple years, then a lease may make more sense.
Keep in mind that housing and transportation costs are the 2 biggest expenses for most Americans. Whether you decide to lease or buy, be realistic about how much you can afford, and make sure you understand all the costs before you make a move. A new car or lease payment can have a significant effect on your monthly budget and your long-term financial goals. A fancy new car isn’t likely to make up for the stress of living paycheck to paycheck or not being able to save for future goals.