Is car leasing right for you?
As the price of new cars goes up, so does the number of people choosing to lease a vehicle instead of taking out a loan to buy one.
Leasing, however, can be intimidating and surprisingly expensive if you have little experience dealing with car salespeople or understanding the lease contract terminology.
“Leasing is just a complicated form of renting,” says Rich Lentz, director of consumer lending at STCU. “It’s designed for someone who is payment conscious, drives fewer miles, and wants to be in a newer vehicle that’s always under warranty.”
Edmunds.com, a car shopping guide, says auto leasing accounted for a record 23 percent of new car “sales” in 2013. That trend is expected to continue as a growing number of young drivers and others look for alternative ways to get into the vehicle they want.
On one hand, there are many reasons to consider a lease, including:
- You want a new and reliable car, but can’t afford to buy one.
- You need a lower monthly payment to fit your budget. (Monthly lease payments can be 30 percent to 60 percent lower than a purchase loan.)
- You don’t have enough money for a big down payment.
- You want to drive a car that reflects your lifestyle. For some, that’s a sports car; for others, it’s an electric vehicle that will be upgraded in a few years with new technology.
- You typically drive no more than 15,000 miles per year.
- You want to avoid maintenance costs. Most leases run three years or less, meaning major repairs are covered under the manufacturer’s warranty.
- You like the convenience of turning in the car at the end of the lease, thus avoiding the hassle of selling or trading the vehicle.
- Or, you expect to keep leasing after the current contract ends. Most dealers give you the option to trade in the vehicle for another lease or to buy the car.
On the other hand, there are many reasons you may prefer to buy than to lease your vehicle, including:
- You like to drive – a lot! Under a lease, you may have to pay 18 to 25 cents for every mile exceeding your annual limit under the contract.
- You want to get out of debt and stop making monthly payments. Leasing a car means you will always have a payment.
- There’s a chance you might return the vehicle early. Some dealers charge a hefty termination fee if you break a lease early.
- You hate paying for insurance. Most leases are for new vehicles, often the most expensive to insure.
- You enjoy being a slob. You must keep a leased vehicle in good condition to avoid extra “wear and tear” charges when you turn it in.
- You want to modify your car. A lease typically prohibits major customizations to the vehicle.
- You prefer the simplicity of a loan. A lease can be packed with surprising fees listed in the fine print of the contract. Some charges may include: A security deposit to protect against default; a destination fee for transporting the vehicle from the factory to the dealership; an early termination fee; and other “drive off” fees such as licensing and taxes.
Understand the lease
It’s critical you know how car leasing works before you step into a dealership to sign a contract for your dream car. Start by understanding leasing terminology. J.D. Power, an automotive research firm, provides an excellent glossary of terms hereThis link opens a third-party website not affiliated with STCU..
When you lease, you are essentially renting the vehicle by paying its depreciation while you drive it. But the dealer still owns the vehicle, and will expect it to be returned in good shape.
Because of the dealer’s interest in the vehicle, your lease agreement will be lengthy and complicated. Take time to read the contract, looking for limitations and fees. If you suspect something is not right, ask about it. Some dealers will negotiate certain charges.
Shopping for a vehicle
Whether you choose to buy or lease, you should first determine what you can afford to pay each month for transportation including tax and licensing. Knowing this exact number will give you the will power (or the excuse!) to stop yourself from agreeing to a deal you cannot afford.
Do some online research — or visit several dealerships in person — to narrow down the type and model of car you want that will fit your budget.
Shopping online is an easy way to quickly compare models and prices. Many manufacturers display a button or link on their website to view “incentives” or “offers.” When you enter your zip code, the site displays the lease and purchase offers at dealerships near you.
Bait-and-switch tactics still happen, so if you see a deal you like, call the dealership before you visit in person to ensure that the dealer will guarantee the offer for the exact vehicle advertised.
Look for deals near the end of the year when dealerships are seeking to clear out previous year models.
The more you shop for a car, the more you learn along the way. If you have several deals and offers to consider from different dealerships, take the offers home and spend time comparing them. If the financial terms confuse you, ask your local bank or credit union if they would help.
Car salespeople may be in a hurry, but you are the one who will be making payments for the next three years. It’s OK to take as much time as you need to sort out the best deals until you feel comfortable with your decision.
To learn more about leasing v. buying, read the Comparing Car CostsThis link opens a third-party website not affiliated with STCU. article at Edmunds.com.