Practical money matters by Jason Alderman
TODAY, I’m wrapping up my series on getting a good deal on a new car by explaining another financing choice for you. Do you want to buy or lease your new vehicle? There are pros and cons to both.
When you lease a new car, you’re paying to use the car during its first few years. Here’s how the system works.
When you lease the car, the dealership actually sells the car to a leasing agency, which is sometimes owned by the dealership. This part is transparent to you.
You put some money down on a lease, just like a down payment. Your monthly payment is determined by the total price of the vehicle minus your down payment, minus the amount the dealer expects 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 the dealer adds 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.
Leasing has a number of benefits. It offers you a lower monthly payment than if you were 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, which is bad.
At the end of a lease, you have the option of giving the car back or buying it as a used car. However, if you plan on buying it at the end of the lease, it might 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 would not make any money.
There are also some disadvantages of leasing. For example, because 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 customize 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 specified in the contract.
These are just some of the stipulations likely to be set forth in the lease contract, so make sure you read it 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, on the other hand, the leasing company estimates the depreciation cost and you pay any difference at the end of the lease. That can be a very costly mistake.
Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.