“Should I lease or purchase?”
This is one of the questions I get asked all the time.
If you tend to keep your cars less than 4 years and drive less than 20,000 miles per year, then you could be a perfect candidate for leasing!
Most people don’t understand leases and upon hearing nightmarish stories about them, many shy away. What makes it worse is that most salespeople don’t understand them either, or if they do, they can’t explain them. If more people understood how leasing works, more people would lease.
The national average of new car ownership in the U.S. is 3.7 years. When you purchase a car you also pay sales tax on the full purchase amount, plus registration and misc fees. This totals out to about 10% more than the selling price of the vehicle (those lucky states who don’t have state sales tax do not apply). People who finance often wrap these additional expenses into their loan, thus incurring finance charges on both the purchase price of the car and on the fees.
When you lease, you only pay sales tax on the monthly payments. You will still pay registration, plus a lease acquisition fee, but it is often quite a bit less than sales tax. When leasing though, you are required to pay the first month’s payment, the lease acquisition fee, and registration charges up front – in the form of ‘Initial Payment’ or ‘Due at Signing’. When negotiating the cost of a lease, you could ask your dealer to make the Initial Payment for you – at a higher monthly lease payment.
To determine if leasing is right for you, ask yourself these questions, in this order:
How often do I change cars?
If you tend to keep your cars for more than 3-4 years, you are probably not a good candidate for leasing. But please read on, because the purpose of your car might be the reason why you should lease.
What is purpose of my car?
With the exception of a very few vehicles, automobiles depreciate in value over time. Leasing allows you to finance the car’s depreciation. If you are a business owner or a commission-based worker (who files a Schedule C at tax time), you may write off up to 100% of your lease payments (please consult your tax accountant to make sure this is valid for you). Additionally, you can lease a car, then sell the car to someone else when the lease is over.
How many miles do I drive per year?
Notice that the mileage discussion comes last. Miles are not the first question to ask when it comes to leasing, but they can have a negative connotation. If you drive less than 20,000 miles per year, you’re a perfect candidate for leasing.
A standard lease agreement is set at 15,000 miles per year, plus a penalty of 15 cents per mile for every mile driven over 15,000. A pre-purchase option is often available for an additional amount that allows you to pre-purchase penalty miles at 10 cents per mile. If you lease a car and drive over 25,000 miles per year, leasing may still be cheaper than buying so long as you have stellar lease rates.
If you go over your mileage, you may decide to sell or trade-in your leased vehicle rather than turn it back in. You can sell the leased car just like a regular financed vehicle. Thus, the mileage is not as important if you have a popular car.
How much is the ‘money factor’?
As you review your lease versus buy options you should shop what’s called your ‘money factor’. This is your lease rate which is similar to interest rate. Be careful though, a money factor of 2.5 is not equal to 2.5% interest rate, so do your homework to ensure you are getting the lowest rate possible.
One last perk!
Another benefit of leasing versus buying? Depending on the miles you drive, your car will always be under warranty! Most leases are structured to keep the owner under warranty for the term of the lease, meaning no unexpected repair costs.
-KF