Here’s another choice for you. Do you want to buy or lease a vehicle? There are pros and cons to both.
What is leasing?
When you lease a new car, you’re paying to use the car during its first few years. Here’s how it works.
You go to the dealership to lease a car. The dealership actually sells the car to a leasing agency (sometimes owned by the dealership). This part is transparent to you. You put some money down on a lease, just like a down payment.
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The lease is actually a loan for the amount of the depreciation.
Your monthly payment is determined by the total price of the vehicle minus your down payment, minus what they expect to be able to sell the car for at the end of your lease. That number is then divided by the number of months in the term of the lease. Then they add a finance charge and a profit margin.
That sounds complicated, but in the end, you’re paying for the depreciation of the vehicle while you use it. The lease is actually a loan for the amount of the depreciation.
Benefits of leasing
A lease will offer you a lower monthly payment compared to buying a vehicle. Plus a much smaller down payment or trade-in is required.
If you like to get a new car every few years, a lease is probably a good option for you. If you buy a car and sell it every few years, you’ll end up with loads of negative equity — that’s bad.
At the end of a lease you have the option of giving the car back or buying it as a used car. If you plan on buying it at the end of the lease, it may be a better idea to just buy it new to start with. If you lease and then buy, the cost of the lease combined with the purchase price of the used car is often much more than the new price of the car. If it weren’t, the leasing agency wouldn’t make any money.
Disadvantages of leasing
Since you are paying the difference between the new price and the used price of the vehicle, you will be charged extra at the end of the lease for anything that decreases the resale value of the car.
You will have to pay to fix any abnormal wear and tear on the car including scratches and dings. You will also have to pay if your mileage surpasses the limit you have agreed to in your lease contract. At 10 to 15 cents per mile, that can become a major cost.
If you’ve customized the vehicle in any way, even if it seems like added value to you, you will probably have to pay extra at the end of the lease.
You’re also locked into the lease for the specified term. If you decide you want to break a three-year lease after two years, you’ll have to pay the remainder of the lease PLUS any termination fees in the contract.
These are just some of the stipulations set forth in the lease contract. So make sure you read your lease contract in full before signing it.
Also, make sure your contract specifies a closed-end lease. A closed-end lease is standard and sets a specific amount for a depreciation cost for you to pay. In an open-end lease, the leasing company estimates the depreciation cost and you pay any difference at the end of the lease. This can be a very costly mistake.
JASON ALDERMAN directs Visa’s financial education programs. Sign up for his free newsletter at www.practicalmoneyskills.com/newsletter.