Should I Lease My Next Car?

When you've made your decision on a new car (or truck, or SUV), the next question you'll have to answer is how you're going to pay for it. Increasingly, automobile companies and dealerships are pushing more people toward leasing. There are at least two reasons for this. One is that with a lease, the dealer and manufacturer are guaranteed to see the customer back in 2 or 3 years, with the opportunity to make another sale. They also get a newer car for resale, which can be certified for resale.

But since the dealer and the manufacturer benefit, does that mean that it's a bad deal for the consumer? Not necessarily. Leasing may actually be one of the few win-win scenarios in today's car market.Leasing does several things for the consumer that provide attractive benefits:

• Lower monthly payment.
• Protects the consumer from wild swings in vehicle values.
• Lowers the tax burden.
• Eliminates the need for extended warranty coverage.
• Preserves cash
• Provides a new car every two or three years.

Let me explain in detail why this is true.

1. Lower monthly payment. The lease cost of a car, truck, SUV or other vehicle is based on the projected resale value of that vehicle after two or three years, based on historical values. That projected amount is called the residual value. The amount that you pay, on a monthly basis, is the price of the car, less the residual value, divided over the term of the loan, plus a finance cost. This works in your favor if you have a car with a traditionally high resale value (generally greater than 50%), such as a BMW, Honda, or Volkswagen, to cite a few makes. The higher the residual, the less you pay. So you get to drive a more expensive vehicle, becuase it's worth more to the dealer or manufacturer to resell after that term. Lease costs are typically in excess of one hundred dollars per month less than the finance cost of a vehicle on a five year loan. Now granted, leases are shorter term, typically two or three years. And some make the argument that you don't own the vehicle at the end of those two or three years, but really, if you're financing, you also don't own the vehicle after two or three years of payments.

2. Protects the consumer from wild swings in vehicle values. There is no greater example of this fact than I can point to than the current collapse of sales in SUVs and large trucks. Because the value of the car is guaranteed in a closed end lease (and you should consider no other lease than a closed end lease), if the value of the vehicle is substantially less than the residual value, you should excercise the option of walking away from the vehicle at the end of its term. In many cases, the values of these large vehicles are less than half, as much as twenty five per cent of the original value of the vehicle. That's a massive loss in value, and unless you have a need for that type of vehicle (in which case you should buy a used one similar to the one you're leasing at the reduced market value) you'd best put your money elsewhere.
   A second scenario is one in which you have an accident. After the car is repaired, at the end of the lease you have the option of walking away from it. Now if you're financing, and attempt to sell that car (after you've paid it off) you'll take a substantial hit when someone runs a vehicle history report, such as CarFax.

3. Lowers the tax burden. You pay a monthly sales tax on a lease, rather than paying the entire sales tax number up front. So if your lease is three years, and on half the value of the car, you've only paid tax on that amount.

4. Eliminates the need for extended warranty coverage. Most warranties run 3 years, which is the term of most leases. If you're going to enter in a new lease in three years, you won't need the extended warranty, which can cost a couple of thousand dollars or more.

5. Preserves cash. Many leases offer a low drive off cost, often consisting of the first month's payment, (sometimes) an acquisition fee, and a security fee. Some locales have documentation and license fees. In many cases, these costs are typically less than down payments that would produce a comparable payment on a standard finance contract.

6. Provides a new car every two or three years. If you're someone who gets restless and trades for a new car frequently, leasing is the way to go. Why put down a lot of money on a depreciating asset, and pay the full sales tax, if you're going to trde the car in four years? Shorten the term to three years, and save the money.

How do you know if a lease is right for you? If you imagine that in a few years you may want or need a new car, a lease is for you. Or if any of the above is true or attractive you should look at leasing. If, on the other hand, you're someone who pays cash for a car and runs it until it dies, then a lease is probably not the best way to go. Of course, you could lease the car, and invest the difference between what you would have paid and the lease cost, and then buy the car at the end of the lease.

I hope this has been informative. If you have questions on leasing, please include in your comments below and I'll be happy to answer them.