Leasing a car has a ton of benefits, especially if you are the type of person who loves having a new car every few years. And leasing a car is pretty popular these days – according to Experian, about 26% of new cars are leases.
But how much does it really cost to lease a car, and how do you know whether you should lease or buy a car?
Leasing a car is essentially renting a car; you pay for the time that you are using it and the depreciation that occurs, but then you return the car at the end of the lease. So which is better, lease vs buy car?
There are a lot of advantages when it comes to leasing a car. Some of these include:
You will have lower monthly payments
The lease agreement covers a good deal of the maintenance
The lease agreement covers some repairs
You will never need to deal with the hassle of selling your car
You can get a new car every year
Leasing a car is generally good for people who do not drive too much, do not want to be bothered with maintenance and repairs, and like to have a new car every few years.
On the other hand, there are some notable disadvantages to leasing a car. Some of these include:
You do not build equity because you do not have the car as an asset at the end of the lease
There will be mileage limits
There will be usage restrictions – you may be prohibited from using the car for rideshares or from leaving the country with the car
You cannot customize the car in any way – no paint jobs, tinted windows, upgraded sound systems, etc.
Leasing a car is generally not good for people who drive a lot and people who like to customize their cars.
There are also a lot of advantages when it comes to buying a car. They include:
You get to build equity – the car is yours and it becomes an asset of yours
You can customize the car how you like
There are no mileage limits
You can decide how, if, and when you make repairs on the car
You can sell the car on your terms
It’s generally easier to get financing when buying as opposed to leasing
Buying a car is good for people who drive a lot and do not want restrictions on their driving. It’s also good for people who want or need to build equity.
There are also some considerable disadvantages to buying a car. They include:
You generally have to put down more money up front
You pay interest on the car’s overall cost, as opposed to leasing where you only pay interest for your length of use
Buying a car can be hard if you are strapped for cash. If you have a good credit score but not a lot of money to put down, leasing a car will be easier for you than buying a car.
When it comes to a car lease, there are a few costs that you will have to consider. There is unfortunately more than just the monthly payments for which you are responsible.
Leases usually require a down payment. The amount required will vary from dealer to dealer, but can easily be a few thousand dollars. It is based on the make, model, location, and other variables from lease to lease. The down payment is also called the “Capitalized Cost Reduction”.
This is what most people think of when it comes to the cost of a lease. This is the fee for using the car every month. It is based on the price of the car (including the added options), the length of the car lease, and the money factor.
The lease money factor is essentially the APR on the lease. Instead of being expressed as percentages, they are expressed as small decimals. You can multiply the money factor by 2400 to give you an approximate APR. (For example, if the money factor is .00275, you can multiply that by 2400 to get a percentage of 6.6%)
The lower the lease money factor is, the better. Sometimes the money factors are not disclosed on the lease sheet, so be sure to ask the salesman what money factor is being applied to your loan. It’s important to have a baseline understanding of what a competitive money factor for your credit score is will help you determine whether or not you are getting a fair rate.
The acquisition fee is essentially the dealer fee for your transaction. It commonly runs anywhere from $400-$900. This may also be referred to as a bank fee or administrative fee.
The return fee is charged when you – you guessed it – return your car at the end of the lease. It may also be referred to as the disposition fee. This covers the cost of cleaning and repurposing your car for sale. It’s usually a flat fee set by the dealership and can run between $300-$400.
Leases always have mileage limits on them. Whether the mileage limit is 10,000 per year, 12,000 per year, or 15,000 per year, you definitely want to keep an eye on this. Do not sign a lease agreement if you know you will go over the mileage limit, as extra mileage charges can add up to a lot of extra money out of your pocket.
The mileage charge rate varies drastically from lease to lease, but usually ranges between $.10 and $.25 per mile. Going just 1000 miles over your mileage limit each year for the length of your three year lease can cost you between $300 and $750. If your mileage overage is high enough, it might make more sense for you to do a lease buyout, as it may save you money.
Wear and tear charges will vary greatly from lease to lease. While minor wear and tear is expected, there are additional fees for whatever the dealer may consider excessive. This may include dents, dings, stains or rips to the interior, or repairs to mechanical issues.
The total cost of a lease is more than just monthly payments, so be sure to take all of these different fees into consideration when determining the total cost of a lease.
It’s important to shop around when looking for a car lease. There are four main things you need to consider when trying to get the best car lease deals and the best interest rate.
The sale price of the car. Even though you are not buying the car, you want to negotiate this number. Your payments will be based partially off this price, so make sure it is fair. Use a website such as Edmunds or Kelley Blue Book to find a fair market price.
The residual value of the car. Also known as the resale value, this is what the car is worth at the end of your lease. You cannot negotiate it, as it is set by the lender, but you want to make sure that you pick a car that has a good resale value in the first place. Most cars have a residual value of between 50% and 58% of their sale price.
The money factor. The money factor, or interest rate, is highly dependent on your credit score. To ensure that you get the best rate available, make sure your credit is in the best shape possible. Make sure you are making consistent, on time payments and are not overextending yourself with monthly payments. It’s always good to check your credit report to ensure there are no discrepancies or any issues that are bringing down your credit score unfairly. If you have good credit, you can find rates between 2% and 5%. If you have average credit, you can find rates between 6% and 9%. If you have poor credit, you can find rates between 10% and 15%.
The length of the lease. How long will you have the lease? Car leases typically last 36 months, which is the length of an average warranty. Be wary of longer leases; they can rope you into paying for more repairs and maintenance.
Leasing can be a very good option for some, while not a good option for others. Look at your driving habits and what your expectations are with your new car. You may find that buying a car is a better option for you.
If you currently have a lease but you are interested in a lease buyout, contact Auto Approve today! We can help you secure a lease buyout loan so you can keep your car for less.
Don’t wait...