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Most consumers in need of a vehicle aren’t able to pay cash. Because of this, you’ll need to determine how you’re going to finance your new car or truck. Typically, many consumers will take out a loan, but leasing a new car is just another form of financing. “Should I lease or buy a car?” is a big deal, especially if you’re on a tight budget and knowing the pros and cons for each decision can allow you to make the best choice based on your specific financial situation.

Should I Lease or Buy a Car:

How Leasing Options Work

Leasing a vehicle is pretty similar to financing the purchase of a vehicle in a number of ways, but there’re a few big differences. If you decide to sign a lease, you might be able to get more car for less money. Leases are based on a percentage of a car’s price while a car loan is based on the full price of a new vehicle. With a lease, you’ll only pay the difference between what the car’s expected worth will be at the end of the year, which is referred to as a car’s residual value, and the car’s price when new. If the residual value is fifty-five percent after a few years, then a car initially worth $30,000 will be worth around $16,000 at lease end.

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Leasing may also be a better option if you have a small amount saved for a down payment. Most leases require a down payment that can range from zero dollars to thousands of dollars up front. Usually, down payments are negotiable. Keep in mind, if you only put down a small amount of cash then the lease payments each month will be higher.

New car bumper to bumper leases will last about three years, which is the average length of a lease. Because the car is under warranty the cost of repairs is usually covered for the entirety of the lease. However, you’ll still be responsible for the cost of car maintenance including tire rotations and oil changes. If you fail to properly maintain a leased vehicle during this time you may be financially responsible if the car has issues due to this type of negligence.

Leasing is also a great idea if you love having the latest high-tech features. Since you’ll lease a new car every few years, each car you lease will offer the current and best safety features and technology. With a lease, you won’t have to worry about getting a good price if you want to sell or use your car as a trade in.

Most leases will limit mileage per year. Mileage restrictions can range anywhere from nine thousand miles to twenty thousand miles a year. So before you sign you should estimate your average yearly mileage because overage charges can be very expensive.

What are the Downsides to Leasing a New Vehicle?

When you lease a car for a few years you’re basically just renting a car and paying interest to finance your vehicle for a specific amount of time. You won’t build any equity because when you lease you’re just renting the car. So, when the lease is up, you’ll either need to get a new car, or take out a car loan to pay for the car you have been leasing if you decide it’s a keeper.

Another downside to leasing is that only consumers with great credit scores will qualify. If you have less than perfect credit then you should consider waiting to lease until you clean your credit up a little.

Quick Tips:

If you lease a vehicle your registration will be in the name of the leasing company. When you lease and the person on the lease contract dies, most lease companies take the vehicle back with no financial implications to the estate. Although technically the lease company can deem the estate responsible. They could tell you the vehicle will go to auction and if the vehicle is purchased and sold for less you might be responsible for the difference. Although this is rare, please check with your leasing company. Every manufacture handles this issue differently. Also see if you have any end of lease fees, which is called a disposition fee. Some auto brands will wave this fee if you get into another lease with the same leasing company.

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Monthly Lease Payment Formula:

A lease payment is made up of three parts;

1. Depreciation Fee
2. Finance Fee
3. Sales Tax

All added together.

Depreciation Fee = ( Net Cap Cost – Residual ) ÷ Term

Finance Fee = ( Net Cap Cost + Residual ) × Money Factor

Monthly Finance Fee = Lease Charge ÷ Term

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If you know your “Lease Charge” or “Rent Charge” from your lease contract and you want to know your Money Factor, use the following formula:

Money Factor = Lease Charge ÷ ( (Net Cap Cost + Residual) x Term )

To convert Money Factor to APR Interest Rate, use the following formula:

Interest Rate = Money Factor x 2400

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So lets see how an example of a lease works  3-year (36 month term) lease of a Chevrolet Cruze 2LT that has a sticker price of $24,600 (MSRP).

You have  negotiated the price down to $23,000 (Cap Cost). You do not to make a down payment, but you do have a trade-in worth $5000. Your Net Cap Cost is therefore $23,000 – $5000 = $18,000.

The dealer tells you that the Money Factor is .00375 (.00375 x 2400 = 9.0%) and the Residual Percentage is 60% of MSRP. So your residual amount, in dollars, is .60 x $24,600 = $14,760.

Here is the Math:

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If you are not up for buying a car right now, then leasing will be a good option. It is easier than buying a car. But, there are some things that you need to take care of so that the leasing becomes easier.

• Make sure that you are clear on what kind of vehicle you want to lease. Will it be a Sedan, SUV or convertible.
• Get a list of the models that fits your price range. No point thinking about options that won’t fit the bill.
• Ask for a test drive after you have chosen the type and the car. Look for features like steering, braking, shock absorption, safety, comfort and more.
• Do not stick to one lease deal. Compare the lease deals to find out which you can afford monthly and then go for the same.
• Do not let the dealer know that you are planning to lease the car. First, negotiate the purchase price as the monthly payments that you will be paying will depend on the final price that is agreed upon. Also, learn the art of negotiation as that is going to come real handy.
• Going for a big initial down payment as this will make the monthly payments lower is not always best. If your car gets totaled or stolen you most definitely loose your down payment on a lease. Very seldom does the customers insurance send back any money to the customer. So putting down money on a lease would be best to just leave in an account and use the money slowly to pay the lease payments and still have the money if a sudden lost becomes of your vehicle.

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