Common questions people have about leasing:
And the biggest question:
The answer is: It depends. Here is what you have to consider:
Your history:how long do you usually keep a car? Do you get attached to a car, and a thought of replacing it brings tears to your eyes? (I actually had people cry when trading a car) Or do you drool over new cars a month after you just bought one? If you get a new car every 2-3 years – you are throwing money away, but at least with a lease – you will throw much less of it.
Your future: are you going to live where you live right now for the next 6 years? Any expected changes in your family? You might move to a city where you can’t or don’t need to have a car, or you might need a bigger/smaller vehicle in a couple of years.
Specific lease vs. purchase analysis for a specific car – some cars have better lease programs than others, and if you are on a fence – check the numbers. For example, BMW Financial Services are known to offer high residual values for their leased cars, which keeps your lease payments low, while some other manufacturers either don’t support leasing as much, or their brand doesn’t hold value as well.
Your tax situation: are you going to use the car for business purposes? If yes – you should be able to use the lease payment as a write-off.
Now, how do we check these numbers? How do we know if a lease is good or bad? As I mentioned earlier, when you lease – you are paying for depreciation and interest. Depreciation is determined by the residual value, or lease-end value of the car. This is a projection made by the bank as to how much this car will be worth at the time of lease expiration. If you want to have lower payments, and have no intention of keeping the car at the end – you want this number to be higher, so you will pay less depreciation. Interest is determined also by the bank, and it is called money factor. While the residual value of the car has to be disclosed, and cannot be changed by the dealer – money factor can be raised for some banks, while some (like Mazda Chase) don’t allow rate mark-up. Banks also adjust these numbers monthly to make sure that their lease programs are attractive and competitive. As residual value of a specific model goes down as it gets closer to the year-end – the bank will also lower the rate, so the lease payment will stay in the same range. And the last piece of the puzzle will be the selling price of the car, or “Cap cost”. Selling price in a lease can be negotiated in the same way as purchase price, so if the selling price is lower – you have less depreciation to pay, since depreciation is always a percentage of MSRP.
Complicated? Kind of… Does it have to be? Absolutely not. All you have to know is the total drive-off, monthly payment, and if you are planning to keep the car after the lease – the residual value. Here is an easy rule of thumb: for every $10K of MSRP you should not pay more than $150 a month with $0 down and minimal drive-off, or you can simply multiply the MSRP by 0.015.Let’s take two cars as an example: Jetta has MSRP of $20,344, and it will lease for $265 a month with minimum drive-off. According to the rule – your payment should be less than $300 for a car in this price range, so the verdict – this lease is good. Now let’s look at a base Jetta TDI with MSRP of $24,004. This car will lease for 338 a month, which is still lower than $360 (the limit according to our calculations), but it is getting close. So the first car is definitely a great lease, while the second one will be a personal judgement call.
Now I will address the main objection to leasing: “But I want to own it!” My response is that in general ownership is overrated. Here is why:
Cars are one of the worst investments ever. Why would you want to own something that will lose half its value in 3 years? And the more expensive the car is – the faster it will depreciate. One of the main reasons I recommend leasing to my clients is that I hate seeing them discovering the car they bought 2 years ago for $30,000 total out the door is worth $18,000 today. I like my clients, I don’t like seeing them in pain.
Risk: remember when gas prices doubled? Remember what it did to SUV resale value? People could not give them away. As you are reading this – car manufacturers are working on new technologies, what if in 3 years they will come up with cars that get 100 MPG, how easy do you think it will be to get out of your car?
Risk again: what if you get into an accident, and it gets recorded in your car’s history? Even after you fix the car – it will follow you everywhere, and most people who shop for used cars would not touch a car that has been in an accident – unless you will give it away.
The myth of not having monthly payments – once the car warranty runs out you are vulnerable to unforseen expenses – tires, brakes, urgent repairs, timing belt – there is no way of knowing how much you will have to spend on your car, while a leased car has a fixed expense – monthly payment.
Sales tax: in California you pay sales tax on your monthly payment only when you lease, but you do pay the full sales tax when you purchase.
In conclusion – sometime you don’t want to have a cow, you just want some milk. If you simply want to get to work and back , or want to get out of town on weekends – look into leasing. While it is not for everybody – it makes sense for many people, and you might be one of them.