To buy or not to buy… to lease or not to lease… these are the questions.
Many clients come to me for help with leasing a car. My first question to them is always, “Why are you interested in leasing?” The answer is almost always, “Because I can get a nicer car for a lower monthly payment.”
If you are leasing simply to get a lower payment, you are asking for trouble. Some dealers even use leasing as a sales tactic to talk someone into a car they can’t afford—often without the customer even realizing that they signed a lease. It’s important to be aware of the differences between buying and leasing, which can help you make the most informed decision at the dealership.
Editor’s note: LeeAnn Shattuck has joined A Girls Guide to Cars as our resident car shopping columnist. A car-purchase expert, she helps her clients to get the best deals on new cars through her business, The Car Chick. She is here to also answer your questions about car buying; email her at [email protected] for her advice, insight and recommendations.
Leasing is a lifestyle, not a financial strategy.
Leasing can be the right solution for certain people, but it frequently gets others into trouble. Why? Because most people are not good lease candidates due to the number of miles they drive each year. (Pandemic years not withstanding!)
The average person in the U.S. drives about 15,000 miles per year, while most leases allow a maximum of 12,000 miles per year (or 36,000 miles total). People also change jobs more frequently these days, which can make your annual mileage unpredictable. You may drive 12,000 miles per year now, but taking a new job across town may increase your mileage to 18,000 miles per year. That’s assuming, of course, that you even know how many miles per year you drive. Most people don’t track this data.
The penalty for going over the mileage limit on a lease can be as much as 30 cents per mile. I have seen people owe as much as $8,000 in “overage charges” at the end of their lease. Many car manufacturers offer higher-mileages leases, but those monthly payments may not be any lower than financing the car with a traditional auto loan.
Car leases are also more difficult to get out of early if your lifestyle or financial situation changes before the end of the lease. When you lease a car, you are only financing a portion of the car’s overall value. As a result, you may have more negative equity in the car if you try to trade it in before the lease ends. With a traditional auto loan, on the other hand, you are financing the entire cost of the vehicle. While you still may have some negative equity to deal with if you need to sell the car before the loan is paid off, it is usually less than if the car is leased.
Not all vehicles are good cars to lease. Leases are calculated based on a vehicle’s predicted “residual value.” In other words, how much the vehicle will likely be worth at the end of the lease term. Vehicles that traditionally hold their value well tend to be better to lease. It also depends on the strength of the manufacturer’s leasing program. Some manufacturers will develop strong lease programs in order to increase sales of certain models.
Leasing a car may be a good option for you if:
- You consistently drive 12,000 miles a year or less
- You want a vehicle that has a high resale value
- You like to have a new vehicle every few years
- You have a second vehicle to drive to help keep the miles off of the leased car
Traditional financing or buying a car is better for you if:
- You drive 15,000 miles or more per year
- You don’t know exactly how many miles per year you drive
- Your living / working situation or lifestyle may change in the next few years
- You don’t have cash in the bank to cover excess mileage charges
- You want a vehicle that does not have a strong lease program
- You don’t have excellent credit
What should you do if you are in a lease now and over your mileage limit?
Getting out of a lease may be tricky, but it’s not impossible. You will likely need a chunk of cash to cover any negative equity. You also have the option to refinance or buy out your lease. A few leasing companies even allow you to renegotiate your lease mid-term if you find that you are driving more miles than planned.
Leasing can be a good strategy for certain car buyers, but most people do better with a traditional auto loan. Determining whether or not you are a good lease candidate is part of my Perfect Car buying process. If you are not sure if leasing is right for you, give me a call to see how I can help you make a smart car buying—or leasing—decision. Or listen to Episode 28 of The Straight Shift podcast for more information on the dos and don’ts of leasing!