If you are in the market for a new car, you have likely wondered whether you should buy or lease. Many people find leasing appealing because they can drive a new car all of the time, and it even allows them the opportunity to drive a luxury or higher-end vehicle that they would not be able to otherwise afford. However, people can easily get caught up in a cycle of leasing, and though it may initially seem like a great option on the surface, leasing a car can come at a very high price if you don’t read the fine print.
The idea of driving a new car out of a dealership every couple of years is very appealing. You will have lower monthly payments compared to buying. At the end of the lease, you hand back the keys and walk out with the keys to another new car. Sounds good, doesn’t it? Until you look beyond the monthly payment amount.
High Fees at the End of the Lease –
When you lease a car, you are essentially borrowing the vehicle for a set amount of time, typically three to five years. When your lease period is up, you can either return the car or purchase it. Either way, you will be faced with high costs and financial frustration.
If you choose to purchase the vehicle, your leasing company will offer you the vehicle at its residual value, which is an estimate of what the vehicle’s value will be at the end of the lease terms and helps to determine your monthly lease payments.
If you choose to return the car, be prepared to get hit with several fees. The stipulations you agreed to when signing your lease are very difficult to adhere to. For instance, you will be charged fees for any excess wear and tear on the vehicle. Wear and tear is inevitable, particularly if the passengers in your car include pets and children, and it is at the leasing company’s discretion to determine what constitutes “excess” wear and tear.
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More Leasing Fees –
Another fee to beware of involves the miles you put on the vehicle. Upon signing, you will have agreed to a certain mileage limit. The average agreed mileage is 10,000 if you exceed your mileage; you will be charged a fee for every mile over the limit and can be as much as 20 cents per mile.
One never knows what life will throw at you and when you will need to use your car. You may have a family emergency that involves travel, thus adding miles. Or, you may end up moving or landing a new job that will increase your commute, again, adding miles you hadn’t originally anticipated when you got your vehicle. You can opt to increase your mileage when you sign your lease, but higher mileage means higher monthly payments. Either way, you are in a lose-lose situation.
Even More Fees –
When most people plan on leasing a car, they focus on how much it will cost them each month. The car dealerships know this. Walk into any dealership and tell a salesman you are interested in a lease car. The first thing he will ask you is how much you want to pay per month. Because with a car lease, the dealership works the numbers to get the result both the customer and the dealership want. It will be the right monthly payment for you and the right profit for the dealership.
Most people leasing a car fail to understand, ignore, or underestimate all the other expenses and fees that go into the price of that car if you decide to buy it when the lease ends. When you are only concerned with the monthly payment, you are ignoring the amount borrowed and the interest rate. This is something you would never do if buying a house for instance.
It doesn’t matter whether you are leasing a car or buying it. The most important number is the buy price. If you don’t negotiate the selling price, you could end up borrowing close to list price. Plus, lease car agreements have all kinds of financial terms such as net capitalized cost and residual value. And then there are destination fees, closing costs, disposition fees, and buying options. All these will affect the value of the car at the end of the term if you decide you want to keep it. While that may not be your intent, it is important information you should be aware of.
Still, that low monthly payment sounds awfully tempting. Consider, though, that before getting the keys you will have to pay the first payment, for plates and taxes. Did you read the lease? Is maintenance covered for the entire lease? Or will you find it only covers the first two years of a three-year lease? What is the annual mileage included in the lease? If you go over that, how much is the charge per mile? What happens if you have an accident? Besides being responsible for getting the car repaired, is there a fee when you return the lease car?
What happens at the end of the lease? Is there a fee if you decide to not lease a car from the same dealer? Is there a fee if you do decide to lease another car? And how much is your buyout if you decide you want to keep the car? You will probably find that buyout is more than if you were to walk onto the lot and buy the same car used. These are all very important questions that should be asked before you sign on that dotted line.
Plus, if you had bought the car outright, you would still have a valuable asset at the end of the loan. There would be no monthly payments until you needed another vehicle. And suppose you put those monthly loan payments into a savings account until you needed a new vehicle. Just think about the nice down payment that would make on your next new car and the resulting lower monthly loan payments.
Before leasing a car, be sure to consider all the numbers. Remember that at the end of the leasing term, you have to turn that car in and get another. Which means you’ll owe the cost of insurance on yet another new car. If you had purchased a car, your insurance costs would go down as the car aged.
Although the short-term costs of leasing a car may be cheaper than buying, in the end, leasing is more expensive and makes less financial sense. If you need to weigh your options to determine what you can afford, contact Advantage CCS. Our counselors can offer you free credit counseling, debt management, and budget management tips as you shop for your new car.