What You Need to Know About Leasing A Car

Money & Relationships GRAPHIC-#4

With the average cost of a new vehicle in America averaging around $37,169, there’s a reason nearly one-third (32.2 percent) of Americans end up leasing a car. The rising costs of vehicles are forcing more American consumers to opt for a lower monthly lease payment over the higher auto loan payment that comes with purchasing a car.

According to an Experian report, the average monthly auto loan payment is $554 for a new vehicle and $391 for a used vehicle. On the other hand, the same report found that it only costs an average of $457 a month to lease a car.

With an average monthly lease payment that’s almost $100 cheaper than a monthly auto loan payment, leasing may seem like a more appealing option. However, leasing may not be right for everyone. While there are many benefits of leasing a car, there are also a few drawbacks.

Below, we’ll go over what you need to know about leasing a car and we’ll provide you with some helpful tips so you can make the right financial decision according to your needs.

Benefits of Leasing a Car

There are many reasons why leasing a car might be the right option for you. Leasing a car is similar to paying rent on an apartment. You pay monthly payments to live in your home, and when it’s time to move, you simply pack up and leave. Leasing is a convenient and easy way to gain access to a reliable car for daily use. Along with the ease of use, some leasees may appreciate:

  • Driving a new vehicle
  • Lower monthly payments
  • Having to pay less money upfront
  • Lower maintenance costs
  • Not having to deal with selling the car down the line

Driving a new vehicle

One of the significant benefits of leasing a car is the fact that you may be able to get a newer model. Driving a new car may not be possible when buying, considering the average new car price. After all, according to the Bureau of Economic Analysis, there were only 5.3 million passenger car sales in 2018, compared to 7.7 million car sales only four years prior in 2014. With new car sales dropping, more U.S. consumers are either buying used cars or signing up for car leases. With a car lease, you can gain access to the newest models, latest safety features, and advanced technology features, sometimes for a lower cost.

Lower monthly payments

When leasing a car, you may have lower monthly payments than you would if purchasing a car. The monthly payment of leased vehicles is dependent on the vehicle’s residual value. Residual value is the estimated price of your car at the end of your lease. The greater the residual value of your car, the lower your monthly lease payment will be.

For example, if you lease a new vehicle using the average new car price of $37,169, and it has a residual value of 60 percent, the vehicle will be worth $22,301.4 (37,169 x .6). That means your lease will be based on the difference, which will be $14,867.60 (37,169 – 22,301.4). If you take out a three-year lease (36 months), your monthly payment will be $412.99 per month (14,867.6 ÷ 36) before taxes and fees.

However, if your leased car has a lower residual value, such as 45 percent, that will mean your $37,169 leased vehicle will be worth $16,726 at the end of your lease. The difference you will have to pay will be $19,443, resulting in a monthly payment for a three-year lease of $540.

Having more car options

This may seem obvious, but leasing a car gives you more car options to choose from. Because leases typically last a few years, you can get behind the wheel of a shiny new vehicle in two to three years’ time. If you’re focused on driving the latest models, leasing may be the right choice for you.

Less money required upfront

When you lease a car, you may pay less money upfront compared to buying a vehicle upfront with a car loan. Leasing a car typically does not require a down payment, but if you are required to place a down payment, it is usually lower than when you buy a car. And, if you want to save even more money, try negotiating the price. Sometimes, lease contracts aren’t set in stone, which means you may be able to persuade the dealer to create a contract that works for you.

Lower maintenance costs

Another thing to know about leasing a car is that the manufacturer will often include a warranty. Under this warranty, most maintenance repairs are generally covered, meaning less money out of your pocket. Whether you need a regular tune-up and oil change or a more serious repair, the cost is often covered in the warranty.

Not responsible for selling the car

Selling a car isn’t always easy, and it can require a lot of effort and time to find the right buyer. However, when you lease a car and the lease is up, all you have to do is drop your leased vehicle off at the dealership, and you’re done—simple as that. Then, you can sign up and lease another brand new car without the hassle of selling your old one.

Drawbacks of Leasing a Car

As with most major decisions, some drawbacks tag along. Leasing comes with many attractive benefits, such as the ability to drive a new car at an affordable price. However, leasing may not be for everyone. Obtaining a lease can sometimes be difficult, as lenders will look at your credit report and debt to income ratio to determine if you’re in good financial standing.

Other drawbacks that come with leasing a car include:

  • Mileage restrictions
  • No ownership
  • Recurring monthly payments
  • May be more expensive in the long run
  • Less freedom

Mileage restrictions

When you lease a car, you aren’t given unlimited miles. Instead, the dealer will outline the number of miles you’re allowed to drive in your contract.

Autotrader.com says most leased cars come with 10,000 to 12,000 miles per year. If you go above and beyond the set mileage limit, you might have to pay a fee.

No ownership

One important thing to know about leasing a car is that you will not own the car at the end of your lease. Whereas you slowly gain ownership of your home when you make mortgage payments or ownership of your car when you make auto loan payments, your monthly lease payments go straight to the dealership. This means your monthly payments won’t help you build equity. However, some lease contracts allow you to buy the car at the end of the term, which is another question to ask when leasing a car.

Recurring monthly payments

Another drawback of leasing a car is that you will always have monthly payments. When you buy a car and take out an auto loan, once you pay off that loan, the car will be yours and you will no longer have monthly payments.

However, when you lease a car, the car will most likely never be yours, unless you decide to lease to own. Leasing to own is where you lease a car, and at the end of your contract, you buy the car for what it’s worth. But, if you don’t lease to own, you will likely have a bill coming in the mail each month. This is why calculating your gross monthly income will help you determine whether you can afford to lease a car or not.

May be more expensive in the long run

Although monthly lease payments are typically cheaper than monthly auto loan payments, you don’t build equity when leasing. This means that you may never sell the car to receive money. If you decide to lease for most of your life, your car won’t likely be considered an asset, which can help you get loans or build wealth down the road.

Less freedom

No ownership of your vehicle also means less freedom. This means when you lease a car, you may not be able to make customizations to your vehicle, such as adding decals, speakers, or upholstery. Additionally, some lease contracts might not allow you to drive your car to another country without getting approval from the dealership. So if you live in America and are planning a road trip to Canada or Mexico, one tip for leasing a car is to check your lease agreement to see what restrictions you face.

Key takeaways on leasing a car

If you’re ready to head to your dealership and sign that lease contract, being equipped with these tips for leasing a car will help you get the bargain you’re looking for. There are many benefits of leasing a car, such as lower monthly payments, low maintenance fees, and the ability to drive a brand new car every few years. However, leasing a car comes with a few drawbacks as well, such a mileage restrictions and credit concerns. Before putting pen to paper, review this guide on what to know about leasing a car to make the best decision for you.

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