- 1 Pros and cons of leasing a new car here in the USA
- 2 Leasing or purchasing your next car or another vehicle, which one is better for you?
- 3 Pros and Cons of Leasing a Car - It is a Good Choice for You?
- 4 Buying vs. Leasing Your Next Ride: Which Option Makes Sense?
Pros and cons of leasing a new car here in the USA
There is a ton of bad information out there about leasing a car.
It is time to bust the myths…
Here is my unbiased, point-by-point analysis on the pros and cons of leasing vs. buying a car:
We always have a payment
With leasing, we always have a monthly payment.
And if we always lease a car, we have a monthly payment for life.
We essentially have a payment for life when we finance a car, too. Because around year 3, cars break down. Plus they need regular maintenance. And we need to replace “consumables” like tires, brakes, timing chains, etc.
So when we factor this into the cost of ownership, we always have a payment – lease or finance.
Gurus and experts like Dave Ramsey, Clark Howard – even Suze Orman warn us against leasing a new car.
They say that leasing is always more expensive.
But apparently, they have never run a simple spreadsheet to confirm this.
I ran the cost per mile of leasing two Toyota RAV4s for 3 years vs. financing the exact same Toyota RAV4 for 6 years…
And as we see below, leasing is actually slightly cheaper than traditional car financing:
There is a myth that we cannot transfer out of a car lease.
But this is not true.
We could use a lease-swapping service. But I do not recommend them, because the service can get expensive and unreliable.
Instead, I would simply “flip” out of the car lease…
Each lease agreement shows the “Purchase Option at the End of Lease” amount. This is the fixed amount of money we need to escape the lease agreement (plus the remaining payments owed).
(No car dealer wants to talk about this strategy, because it takes away the dealer’s profit.)
“A leased car is more expensive to insure”
They say leasing a car is more expensive to insure than buying a car. But this is not true. Usually the insurance cost is exactly the same. Sometimes it is even lower, because insurance companies reward us when our newer cars have “nanny” (i.e. self-driving) technology.
Penalties for wear, tear, and mileage
If we beat up our new car, we have to pay for the damage.
This is also true if we finance a new car, too.
If we do not “flip” our end-of-lease car for a profit, we might have to pay damages…
I say “might”, because leasing companies give us “allowables.” For example, we can have a dent less than the size of a quarter… a scratch less than the size of a credit card – even stained seats and carpet.
With a financed car, wear, tear and excess mileage lowers the market value of our car.
So it does not matter whether we lease or finance… it costs EXACTLY the same for damages and excess wear.
And about leasing and excess mileage. Again, it costs us the same whether we lease or finance a car…
The wholesale “over the mileage limit” is about 9 cents a mile…
So, if we go over the mileage limit, I recommend we “flip” our car – which will decrease our equity by 9 cents a mile…
Of course, financing the same car will decrease the market value of the car by the same 9 cents.
In simple speak, driving too many miles will cost us about 9 cents a mile whether we own or lease a car.
“We need to buy expensive GAP insurance”
Actually, this is a con against financing a car…
Because almost every car manufacturer includes GAP coverage insurance in the cost of leasing their cars. (Toyota is the exception.)
There are no hidden costs or surprises.
Once we agree upon a monthly price, that is it.
Everything is included or covered against repair costs.
We never have to worry about paying for maintenance or repairs. Because when we lease, we always get the car manufacturer’s full warranty.
In fact, the only out-of-pocket cost we have to worry about with leasing is:
– Windshield wiper blade replacements…
– The cost of one oil change per 36-month lease.
With leasing, the car manufacturer’s warranty usually covers any problems during the term of the lease.
Leasing cars are usually safer
When we lease for life (which I strongly recommend), we are always driving the safest car at the absolute lowest cost per mile.
We are always trading in an older car for the newest car. So, we are always upgrading our ride and getting into safer cars.
Better investment opportuntities
Unlike financing a car, we only pay for the depreciation. So if the average car depreciates 50% over 36 months, we are always driving the car at half the price. Even better, if the car depreciates 70% over the same 36 months, we get the car 70% cheaper. Again, we only pay the inverse of the residual value of a car.
Instead of sinking 10% of our income on a depreciating asset, we only pay for the use of the car. This allows us to invest in appreciating assets that pay back higher returns.
Significantly lower taxes
In all but 3 states, we are taxed on the monthly payment instead of the entire selling price.
This usually slashes the monthly tax payment in half. (Even better, Georgia is lowering their tax calculation on January 1, 2018. That leaves Texas and Virginia as the only 2 states taxing on the more expensive selling price).
Guaranteed higher credit scores
Our credit score improves when we lease a car.
Because only the total of the monthly lease payment shows up on our credit file.
So instead of $24,000 of debt showing in our file, it might be just $8,000. This helps with our LTV (Loan-To-Value) ratio.
The bottom line is leasing boosts our credit score – usually in a significant way.
When we lease a car for business, most of the payment gives us a lucrative tax break.
For example, if we use our car for business 75% of the time, we can use 75% of the entire lease payment as a line-item deduction. (But when financing a car, only the interest amount is deductible.)
Contrary to the myth, car insurance rates are actually lower when we drive safer cars (not expensive cars). And leasing lets us get into safer cars more often than traditional financing.
I developed a car leasing system that gets car dealers to compete against each other.
In about 9 hours, we get the lowest car leasing price emailed to us.
Even better, once we choose the dealership, they deliver our new car to our home (or office).
We never step into a dealership. And we never even see our salesman.
But the best part is my service is virtually FREE…
Because instead of having to pay thousands for a down payment, my system gets that waived.
To get access to my system in just seconds, click here to order my KTL USA At-Home Leasing System.
Leasing or purchasing your next car or another vehicle, which one is better for you?
Below is an overview. If you have any specific questions if leasing or buying is right for you, please call us at 718-975-9000, and we will be happy to help you decide whether to purchase or lease a car or any other vehicle.
When you buy or purchase a car, you pay for the entire cost of a vehicle, regardless of how many miles you drive it or how long you keep it. Monthly payments are higher for purchasing a car or vehicle than they are for leasing that same car or vehicle. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company based on your credit score. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale or trade value.
When you lease a car or vehicle, you pay only a portion of a vehicle’s cost, which is the part that you “use up” during the time you’re driving it. Leasing is a form of financing and is not the same as renting. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit that you don’t pay when you buy or purchase a vehicle. You make your first payment at the time you sign your contract â€” for the month ahead. At lease-end, you may either return the vehicle or purchase it for its depreciated resale value. In some cases, you may be charged a lease-end disposition fee at the end of the lease.
Pros and Cons of Leasing a Car - It is a Good Choice for You?
Last Updated: August 1, 2017
If you are in the market for a new car, you are probably wondering if you should purchase a vehicle or lease it. According to Kelly Blue Book, the average price of a new car or truck sold in the United States in 2016 was $35,421 - which is up from 2015. Higher prices for cars means higher monthly payments for consumers. This is why car manufacturers and dealerships are always looking for ways to make these cars obtainable for the average American. Hence, the concept of leasing a vehicle, which allows people to get more car for their monthly car payment.
An auto lease is essentially a long-term rental of a brand-new car. A customer signs a contract to rent the car for a period of two to three years, thereby making monthly rental payments. The customer agrees to keep the car in good shape and drive it only a certain number of miles a year. At the end of the lease term, the customer can purchase the vehicle for a predetermined cash amount (residual value) or turn the car back in to the dealership and lease another brand new vehicle. The big question is
is leasing a vehicle right for you? This article will lay out the pros and cons of leasing so you can determine if leasing a brand new car fits your budget and your lifestyle.
Leasing a brand new car is a good option for people who:
- Have good credit.
- Buy a car every two to three years.
- Don't put a lot of miles on their vehicles every year.
- Like having a car payment no matter what.
- Keep their cars in immaculate condition.
- Are writing off the car payments through a business expense.
Low monthly payments may tempt one into leasing a car, but leasing is not a good option for people who:
- Drive more than 12,000 miles per year.
- Are not prepared to put the car back to good condition prior to turning it in. (replacing tires, cleaning interior, fixing any dents or dings)
- Have less than good to excellent credit.
- Don't like the hassle of getting a new vehicle every two to three years.
Beware of Dealer Tactics - Most people don't understand how leases work, so it's pretty easy for dealers to rip them off. Like a magician who distracts you with some meaningless hand movement to disguise the way the trick really works, the dealer keeps you focused on the monthly payment.
Know the Cap Cost - Even if you think you have negotiated a price, known as the cap cost, the dealer can inflate the price on your paperwork, and often they succeed. The cap cost is important because it is the price on which the lease payments are based. If you do catch a dishonest dealer in the lie of raising the cap cost, he may tell you that it represents finance costs (baloney), or that your lease payments are not based on this cost (blatant lie). The bottom line: Read your paperwork and take your time about getting questions answered.
Make Sure to Do Some Comparison Pricing - Dealers also try to sell you on leases by doing a comparison between the payments for a lease and the payments for the same car on a conventional loan. Invariably, the comparisons show the lease payment to be the winner. Check the payment calculations - are they based on the same number of year's payment calculations? Most lease payments in these comparisons are based on a five-year payment schedule. Conventional loan payments are often calculated on a three-year schedule, so the dealer is giving you a comparison of apples and oranges.
Watch Out For Inflated Interest Rates - Since you are just renting the car, and technically are not getting a loan, the leasing company isn't required by law to tell you the interest rate on which they are calculating the lease payments. In fact, the "interest rate" a lessor is charging you is not an interest rate at all (since again, you are not getting a loan) and is called the money factor. The money factor is a fractional number, such as 0.0042, to calculate the lease fee or charge. The monthly payment combines the resulting fee with the depreciation charge. Neither the money factor nor the lease charge is an interest rate in the traditional sense; both are part of a formula devised by lessors to determine their profit. Yep, profit. The reason lease companies are in business.
Will dealers tell you the money factor? Yes, but only if you ask. The formula for converting the money factor to an APR is also not required to be given to the consumer by law. Like credit score calculations, it is somewhat of a mystery.
If the money factor is expressed as a percentage, convert the percentage to the money factor by dividing the number by 24 (yes, it's 24 regardless of the term of the lease). For example, a 7 percent (.07) interest rate converts to a .0029 money factor.
You are not buying the car, so there is no such thing as a down payment in a lease. What you are doing is making payments in advance. Say you put $2,000 down to make a $400 payment over 24 months drop to $350. Sound like a good deal? Let's look a little closer. This may prove more expensive in the long run.
Let's say, for example, that you have a two-year lease - you will pay $400 x 24 = $9,600. But if you slap down the $2,000 up front, you're actually paying $800 more for the vehicle:
To calculate a lease payment, you must know what the car will be worth at the end of the lease - the "residual value." The difference between the cap cost and the residual value is the figure that the lease payments are calculated on.
So if you have a car with a cap cost of $18,940, and a residual value of $7,125, the payment amount is calculated on $11,815. With a money factor of 0.00166 (an APR of 4%), the payments are $329.
Watch out for these additional factors when considering a lease:
- Some leases involve all kinds of up front fees, many of which are non-refundable.
- Most leases only allow a maximum of 12,000 - 15,000 miles a years, after which you are charged up to 25 cents a mile.
- In addition, when you turn in your vehicle, it is inspected with a fine tooth comb, and you can expect to pay a high fees for every scratch, nick or dent, or wore out tires.
Should You Purchase Your Vehicle at the End of the Lease?
After two or three years, you are coming up to the end of your auto lease agreement - now what? Suppose the residual value of the vehicle is several thousand dollars below the retail value, as given in the Kelly Blue Book. After paying lease payments for two or three years, you may feel that you should "get something out of it" by purchasing the car. But is that the right move for you financially?
You also can trade in your leased car as if you owned the car with another dealership. Some benefits to selling the car out of the lease are that you will get the full security deposit back, you won't pay a lease disposition fee, you don't have to worry about excess wear and tear charges, and you don't have to worry about how much tread is left on the car's tires. But before you start counting your profits, make sure that your lease agreement allows you to trade or sell the car before the end of your lease term.
In the end, you must pay attention to every aspect of the deal to make sure you are getting the best price and payment available:
- Always calculate your own lease payments and be ready to challenge the dealer.
- Look over your paperwork carefully.
- Ask to have the money factor (and its corresponding APR) given to you in writing.
Below are some terms you will frequently see and hear when you are leasing a vehicle:
- Cap Cost: Lease payments are based on the cap, which is the selling price of the car.
- Residual Value: This is the predicted value of the vehicle at the end of the lease term, and is expressed as a percentage of the MSRP (the sticker price). Most cars have a residual value of between 50 and 58 percent for a 36-month lease. Sometimes, dealers raise the residual value to lower monthly payments. This is OK, unless you plan to buy the car at the end of the lease.
- Money Factor: This is lease-speak for "interest rate." It plays a big part in the calculation of a lease payment. If the money factor is expressed as a percentage, convert the percentage to the money factor by dividing the number by 24 (yes, it's 24 regardless of the term of the lease). For example, a 7 percent (.07) interest rate converts to a .0029 money factor.
- Term of the Lease: This is the length, in months, you lease the car for. Popular leases are 24, 36, 48 and 60 months. Some lease companies write leases for 38 or 42 months. The 36-month lease makes the most sense because most cars will be covered by the factory warranty for the entire time.
Hopefully the information in the article has helped you unravel the mystery of auto leasing. Weigh the pros and cons carefully as they pertain to your budget and lifestyle to see if leasing is best for you.
Buying vs. Leasing Your Next Ride: Which Option Makes Sense?
If you’re in the market for a new ride, you have plenty to think about. Car or truck? New or used? Cash payment or financing? Dealer or private party? The options are virtually endless. And while it can be overwhelming to consider additional options, it would be unwise to proceed too far without also thinking about whether you want to buy or lease your next vehicle.
For some reason, you don’t hear much about leasing cars. Most people are comfortable with leasing an apartment or home, yet their immediate inclination is to buy a vehicle. In many cases, this makes complete sense. However, there are also times when leasing is the superior option.
If you’re in the market for your next vehicle, don’t automatically assume that buying is the only way to go. It very well might be the best option for you – and it is for millions of people – but it would be unwise to totally ignore the possibility of leasing. In this article, we’re going to dissect some of the pros and cons for both buying and leasing so that you can get a better idea of which opportunity is best in your situation.
Most people end up buying a new or used vehicle because of the many advantages this type of transaction affords. Here are the top reasons to consider buying:
- Ownership: The most obvious pro of buying is that you get ownership of a vehicle. Not only does it feel good to own something, but this also increases your personal net worth through additional equity. You can do whatever you want with the vehicle and choose to sell or trade whenever you see fit.
- Flexibility: Buying comes with a lot of flexibility. In addition to the flexibility mentioned in the previous point, buying also enables car owners to make cosmetic changes and additions to the vehicle. Want to add an accessory? You can add as many as you want and nobody can tell you otherwise.
- Resale: Ultimately, you get the advantage of resale value when you decide you’re done with the vehicle. While the resale value will be a fraction of what you paid on the front end, it’s nice to know that you can recoup some of your expenses and use that money to buy your next vehicle.
However, for every pro, you could argue there’s also a con. Check out these disadvantages of buying:
- Down payment: The biggest disadvantage of buying is that it’s costly. If you pay in cash, you obviously have to fork over the entire amount. But even if you finance the vehicle, you’ll need to pay a hefty down payment, taxes, registration, dealer fees, and other add-on expenses.
- High monthly payments: Generally speaking, monthly loan payments are higher than lease payments. This is because you’re paying off the entire purchase price of the vehicle, not just the vehicle’s depreciation during a lease term. In some cases, the difference will be nominal, but in others, it can be a few hundred dollars per month.
- Interest payments: Finally, if you finance your purchase, you’ll have to pay interest over the life of the loan. Depending on the length of the loan, amount, and rate, this can easily add up to a few thousand dollars.
Now let’s shift our attention to leasing. While it certainly doesn’t get the same amount of attention as buying, leasing comes with a number of pros. They include:
- Low upfront cost: The beauty of leasing is that the upfront cost is extremely low (when compared to buying). You’ll typically be asked to write a check for the first month’s payment, a refundable security deposit, and other fees. It’s not cheap, but it’s certainly not as expensive as buying.
- Low monthly payments: As mentioned, lease payments are generally much lower than loan payments. (Use this calculator to get an idea of the difference). With a few hundred extra dollars in your bank account each month, your budget will be able to breathe a little more.
- Ability to walk away: If you’re tired of the vehicle at the end of your lease, you can walk away. People who love driving different vehicles every few years find this aspect of leasing very desirable.
If you stopped with the pros, everyone would be leasing their vehicles. As you probably guessed, there are also some cons. Here are the ones you should know about:
- No ownership: The biggest disadvantage of leasing is that you aren’t building any equity. Your monthly payments simply allow you to use the vehicle. You won’t be able to recoup any of these payments with a future resale.
- Mileage limitations: Most leases will actually limit the number of miles you can drive. This is typically between 12,000-15,000 miles per year. If you drive a lot, you could easily surpass this threshold. As a result, you’d have to pay additional charges.
- Inability to customize: Finally, there’s no ability to customize your vehicle if you lease it. Everything must be the same at the end of the lease, which means there’s very little opportunity to make the car feel like your own. For some people, this is a big deal. For others, it doesn’t really matter.
As someone who’s in the market for their next vehicle, it’s important that you weigh your options. While buying often makes more sense, leasing is sort of a hidden gem that few people ever give consideration. Your choice is highly personal and will depend on a lot of factors, but don’t be afraid of spending even more time analyzing your options.