Should You Lease or Buy Your Next Car?

lei-benzYou want that new car. But what should you do – lease or buy?

Buying a car is more expensive initially, and the monthly payments are higher. But at the end of the loan, you will own a car you can still drive or sell.  A lease requires little or no money up front and offers lower monthly payments, which means you can drive nicer cars for less money. Of course, at the end of the lease, you’re car-less again!

Bottom line? When it comes down to making the choice of leasing or buying, you should consider price and preference. But before you run out and leasing the first sexy hot rod you find, first know what you are getting into with leasing a vehicle.

Getting Started

Before shopping around, first estimate what your monthly payment will be – more specifically what you can afford.  Keep in mind you will also need to factor in cost for insurance and gas, as well as an initial down payment.  Run the numbers and print out the results. It will not only show you what you can afford, it also helps you control the numbers when negotiating. Be sure to first assess what you can really afford by reading How Broke Will You Really Be After Graduating?

Leases use a complicated system to determine the finance percentage you’ll pay each month. Unlike “buying” a new car where the better your credit rating, the better your finance percentage – a lease is not as flexible. They base it on something called a money factor that translates to a percentage. This is determined by the car company (not the dealership) and is not based on your credit rating. Banks do not typically offer financing for new car leases.

You will also want to keep in mind that there might be some payment due at the end of the lease, depending on damages and mileage. Leasing contracts specify that you must return the car at lease-end with no more than “normal” wear and tear.

Most new contracts do a pretty good job of spelling out exactly what normal means. The bottom line is that you have to take good care of the car and keep it well-maintained. If there is significant damage – seriously worn tires or deep scratches, for example – you should get them repaired before your return the car, or expect to pay after you return the car (how much is the question).

The following checklist is among the required paperwork when signing your lease. This list is set up by through the “Federal Consumer Leasing Act Disclosures” intended to protect you, the consumer.

  • Amount due at signing
  • Monthly payment
  • Other charges
  • Total of payments
  • Amount due at lease signing
  • How monthly payment is determined
  • Early termination statement
  • Wear and tear explanation

Know the Terms

You will need to verify the following four figures before signing the lease. It will be beneficial if you set the terms of the lease, including mileage and down payment, ahead of time; this will also help with comparing payment quotes. Once you get all your quotes in hand, you can take the lowest quote and ask the other dealers to beat it. You can also take the numbers they provide, and calculate backwards to find all the figures the contract is based on.

  1. Term: 36 months is the longest you should lease a vehicle for because it will never be out of the bumper to bumper warranty. Less than three years is okay but the payments will be higher.
  2. Mileage: Most lease payments are based on 12,000 per year (36,000 miles for a three-year lease). It’s better to negotiate to have them included up front, if more mileage is needed.
  3. Down payment: In lease-speak this is called “drive off fees.” It is recommended that you put less than $1,000 down.
  4. Monthly payment: This is what it’s all about. When you get a quote from a dealer, make sure all fees are included. All too often, lease payments are quoted without taxes and fees to make them more attractive.

Tips to Keep Your Costs Down

  • If you are getting quotes from a lease special it will probably be “subvented” by the manufacturer. This means they have done a lot of the work for you by setting the residual value high, the interest rate (“money factor,” in lease-speak) low and the capitalized cost (the price of the vehicle) at invoice.
  • Don’t go above a 36-month lease; the car will be out of the warranty at that point. Don’t accept the first number the salesperson gives you, especially if it’s not close to the number you had in mind. They’ll expect you to negotiate it down. And ask if the dealership is running any rebate specials on leases. This could knock $500 to $1,000 off the price. If you graduated college recently, they may have a special rebate for that too.
  • You will be given the option of having 12,000 or 15,000 miles a year allowed for your mileage and the price difference will be between $50 to $100 per year. While it’s tempting to go for the extra mileage, keep in mind that many carmakers will forego the extra mileage at lease turn-in.

Whether you are buying or leasing, you will need two things: good credit and a realistic monthly budget.

Automobiles can easily end up siphoning a good chunk of your income after adding up monthly payments, fuel, insurance, and of course weekly visits to the car wash to make your new baby shine!

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