What is Leasing? What is in it for me? What is in it for the Dealer?
I sold cars for a while and a common question I experienced was “What is leasing?” What are the benefits? Risks? Good sides and bad sides? Below is a primer on these questions as well as a glossary of leasing terms. Hope it helps:
Being able to drive a brand new vehicle is one of the main benefits of leasing. You won’t be driving any used vehicles that might have issues with them. And you can still choose from several different models of the vehicle you would like to lease, so you will not be getting stuck with some boring base model if you don’t want to. You will still be able to choose from different options, including whether or not you would like an infotainment system, navigation, and other premium features.
Lower Upfront Costs
When you purchase a new car, you will often have to pay several additional fees including a down payment, destination charges, taxes, and other expenditures. Typically with a lease the down payment is much less and the rest you do not have to worry about.
Lower Monthly Payments
Keeping with the lower cost trend, monthly payments for leased vehicles is usually much less than the monthly payments for purchasing a new vehicle. This means that you will be putting more cash back in your pocket each month and saving quite a bit.
You Have “Escape” Options
(Most Important in My Opinion)
One of the best aspects of leasing is that it is not long term and you are not attached to that vehicle for life. When you enter a loan (purchase a vehicle), you agree to pay for that car for 5 years (if it’s a 60 month loan). Then you make payments for 5 years and get a title – there is nothing in the middle there. If your life changes (have twins, move to a different region, etc.), you are still making payments on the vehicle. If you want/need to get a different car, you can trade the car, but you are committed to 60 months of debt and likely need to be more than 60% through the loan to have equity.
With a lease, you are agreeing to pay for the car for 36 months. After that, you have three “escape” options. You can:
Give the car back
Not many people do this, but if you are under the agreed miles, you can simply have the car inspected by the manufacturer and return it to a dealer. Only a practical decision if you’ve somehow acquired a different vehicle in life or don’t drive, etc.
Trade the car
Most people don’t know this but you are making payments towards equity in the car (you own a portion of the car). So, when the lease is up (or any time during your agreement), you can trade it for another vehicle (new or used/same or different brand). The dealership will appraise the car as usual and you have your equity less your pay off (remainder of lease agreement unpaid). [essentially a normal trade in, except you don’t have a 5 year agreement – so less pay off]
Buy the car
You’ve had the car for 36 months, so you may like it. If that is the case, you can buy it (“lease buy out”). When you sign for your lease, you will know the residual value of the car (the remainder of the cars MSRP minus the sum of your payments). Say the car was $20,000 and it had a residual value of 60% - after three years, its residual value is $12,000. If you want to buy the car, you simply need to finance or pay for $12,000. Now that is a smaller lump sum than the original $20,000 and you can likely get a loan that is shorter than 60 months. This is a longer process of ownership (you’ll be making payments for 6-7 years [pending on your loan terms], but you will always have a lower monthly payment.
So What’s the Catch?
If this sounds ‘too logical’ or the classic “too good to be true,” you’re wondering “what’s the catch?” What is in it for the dealer? That is simple – you get a lower payment and more options, the dealer has a higher likelihood of seeing that car again as a used car. Most people who lease are back in 2-3 years to trade in their leased vehicle and upgrade. You can often do this without raising your payment much.
What if I go over miles?
You will agree to a specific amount of miles (usually 1,000 miles a month) in your lease (i.e. 36 month. This really only matters if you are going to take Option #1 and give the car back at the end. If you are over miles then, you pay a fee per mile ($0.XX a Mile). If you Trade/Buy the car, this plays no part, other than determining the car’s market value.
If you are not hung up on the concept of having a car payment, leasing allows you to have a new vehicle that will likely not have too many maintenance problems. You are also “protected” from the random life events that happen. In you are leasing a sub-compact car and have triplets (yikes!), it is less likely that trading in your leased vehicle (unexpectedly) will cause you a negative equity situation than trading in a financed vehicle.
Glossary of Leasing Terms:
Residual Value – This is the percentage of value (compared to MSRP) that a vehicle will have when the lease term is fulfilled.
Money Factor – This is essentially the “interest rate” of your loan (doesn’t read like a APR does, reads like a 0.0135). Some leases have really good MF’s and that means you can likely get a lower payment on the vehicle at that time (Just like special APR’s).