There is a general lack of understanding about the concept of leasing a car that makes it unappealing to consumers in general. This is because the mechanics involved in leasing are not common knowledge, and most people simply do not understand how it works. Although leasing is for everyone, it makes more financial sense than most people think.
Why People Choose Not to Lease
The most common reason that people give for not wanting to lease is the fact that you never own the car when you lease. A lease allows you to rent a car for a fixed amount of time, which usually ranges between two to three years. You’re only paying for the time that you spend using the car. This is why leasing is seen as a long term rental. You’re not building any equity when you lease a car. However, are you really building equity for the first few years when you finance a car?
A car is a depreciating asset. It loses 40% – 50% of its value in the first year alone and is worth less as time goes on. So, when you finance a car for five years, you don’t have any equity in it for the first three years even though you’ll still be paying interest on it. In most cases, the value of the car won’t exceed the balance due on the loan until after the third year. Leasing a vehicle is the best way to overcome the depreciation of a vehicle, which can represent a significant capital loss to the owner.
How it works
- Unless otherwise stated, all vehicles available for leasing are brand new and are covered by the manufacturer’s warranty, sourced direct from main dealers.
- Determine what make and model you want, plus any options or extras you’d like – just as if you were purchasing the vehicle.
- Decide how many years you want to lease the car and what your annual mileage is likely to be.
- You have the option of including maintenance in the contract. If you do, all bills for repairs, tyres, servicing and parts are taken care of by the finance company.
- Road tax is usually included for the duration of the lease. However, you are responsible for insuring the vehicle, and insurance companies will require fully comprehensive insurance.
- Your initial outlay is usually the equivalent of three monthly rentals. However, it could be as low as one rental depending on your circumstances. Most leasing companies will allow a maximum of12 rentals. The cost of your monthly payment depends on your annual mileage, the cost of the vehicle, and what it’s likely to be worth at the end of the contract hire period (the residual value).
Leasing gives you the perfect opportunity to drive the latest car model with all the latest features every few years with relatively low monthly payments. This allows you to have access to new cars that you may not have been able to afford to buy. You can enhance the style of the car with GPS, back-up cameras, leather interiors, etc. You’ll also not be binding yourself to a five-year loan or worrying about the resale value of the car.
If you love driving the latest models and don’t plan on keeping your car after three years, then you probably should be leasing rather than buying. If you are buying a new car before paying off your current one, you’re essentially choosing to pay $500/ month for the exact same thing you could have leased for $400/ month. Since you’re going to have a monthly car payment no matter what, you might as well minimize your payments.
The most appealing reason why you’ll want to lease a car rather than buying it is the much lower immediate cost. There are usually no initial payments required and an upfront sales tax does not apply to the price. When you lease, you’re only paying for a portion of the car rather than the whole thing. This offers a significantly lower payment than financing that same vehicle, improving your personal cash flow.
Furthermore, driving a new car is a fantastic opportunity to reduce your fuel consumption rate. The numerous breakthroughs in fuel efficiency in the last few years means less money spent on fuel, so some of the higher price associated with a newer car will pay off on your subsequent gas station visits. In some parts of the world, consumers have reported average savings as high as 50% for some models. If you live in a country where fuel is expensive, this could become your tipping point in the decision to get a new car on lease.
Consider the following example: if you buy a car for $35,000 for 5 years, you’ll be making monthly payments of $583 (without interest). If you lease the same car for 36 months, you’ll only be paying for 45% of the car, resulting in monthly payments of $437. This offers a significantly lower payment than financing that same vehicle. Furthermore, when you lease, you can get a luxury car for a lower monthly payment than you would if you finance a much cheaper car.
Types of Leasing
In the US, there are two main types of car leasing deals – closed-end and open-end leasing.
- Closed-end Leasing: With closed-end leasing, you leave the car with the dealer at the end of the term and walk away. You have an option to purchase the car for the agreed residual value at the end of the lease term. Closed-end leases are not used for property which increases in value. This is the preferred method of leasing a car because of the reduced risk and lack of obligations at the end of the contract term.
- Open-end leasing: An open-ended lease will require you to purchase the car once the contract runs out. Most experts advise against an open-ended lease, and suggest drivers to finance a loan right from the start if they wish to eventually become owners of the car.
Your personal situation will play the key role in your decision to either take on one of the other type of leasing or none at all. If you prefer to own a car, you should definitely take a loan and finance the car as soon as possible. On the other hand, if you dream about driving the latest car models every two or three years, you’ll find that leasing is the most convenient way of doing that.
Main benefits of leasing a car
- Fixed monthly payments – easy budgeting of your motoring costs.
- Leasing eliminates the risk of negative equity. When you come to the end of your 36-month or 48-month lease, you either jump into a new lease or walk away. If you were 3 or 4 years into a 7-year financing deal, you would likely be in a negative equity.
- All servicing & maintenance costs and roadside rescue can be included
- Every new car comes with a power train and a bumper to bumper warranty. This means that if you lease a car for 36 months, the entire time you are driving that car, everything is covered under the warranty (unless you exceed the mileage). This means you’ll never be paying for repairs on your vehicle.
- You’re getting the latest car model with the latest technology every 2 or 3 years, avoiding the costs of running an old vehicle. When you get a new car every 2-3 years, you are guaranteeing that you have the newest technology. This technology affects several areas, including safety, reliability, features, options, performance, and mpg.
- Road Tax is usually included for the duration of your lease.
- No concerns about depreciation associated with ownership. The main disadvantage of purchasing a vehicle is that it is consistently losing value. While this is to be expected, there are unforeseen and extenuating circumstances that can cause some cars to lose value even faster than normal. If you have financed your car, you could take a significant financial hit. If you take out a lease, you’ll never be exposed to that level of risk. At the beginning of a lease, when determining an end of lease value for the vehicle, the leasing company assumes all the risk for a loss in value. Your lease payments are fixed and cannot be changed by the leasing company once the lease commences.
- Flexible terms and mileage allowance to suit your needs.
- Low initial outlay compared to purchasing a vehicle.
- You can often afford to drive a luxury car than if you were buying a vehicle.
- Avoid the hassle of disposing of a used vehicle every time you change your car.
- No need to trail around the dealers looking for the best part-exchange price.
- Free delivery (and collection) of your new lease car to your home or office
- You are able to put your Personalised Registration Number on the lease car.
- You can take your lease car abroad on holiday or business.
- At the end of the lease you can hand in the keys to the dealer and simply walk away with no debt. If leasing suits your lifestyle and budget, you can turn in the car and continue to lease indefinitely.
- Flexibility to extend the lease at the end of the term for a further 6 or 12 months
- You may be able to purchase your lease car as one of your end of contract options.
Leasing may be the right choice for you in the following circumstances:
- You want to know exactly what your motoring expenses will be every single month.
- You want a totally reliable car and don’t want to have to shell out on repairs or maintenance.
- You want to drive a brand new car every few years.
- You don’t want to worry about how fast your car is depreciating every year.
- You are not able to put down a hefty initial deposit.
- You want a car that’s perfect all the time and don’t want to be bothered with the inconveniences and maintenance costs that come with used cars.
- You have a solid idea about how many miles you drive each year, so will not be concerned about excess mileage charges.
- You like the idea of having the option of handing back the car at the end of your contract without any further commitment, extending the lease or getting a new car.
There are some significant downsides to leasing which might deter some people from choosing to lease a vehicle. These include:
- You don’t own the vehicle. Leasing subjects you to a permanent financial obligation for as long as you are using the vehicle you were given. If you stop making payments, it will be repossessed.
- Since you’re not the true owner of the car, the company that leases it to you wants to retain the value of their property. That’s why the contract you sign is likely to severely restrict your annual mileage. If you underestimate your annual mileage, you will have an excess mileage charge to pay at the end of your contract.
- Insurance costs are likely to be higher for leased vehicles unless you have an impeccable driving record.
- The car must be returned in accordance with the finance company’s ‘fair wear and tear’ policy or you may be liable for any damages that occur to the vehicle.
- Drivers who lease their car make payments to cover the difference between its original purchase price and the residual value. The residual value is what the dealer predicts the car’s price to be at the end of the year. This means that when you lease one of the latest models on the market, your payments will inevitably fall into the years when that car is most expensive. As a result, the monthly payments for brand new car leases can go through the roof. To mitigate the impact of this problem, you’ll want to look for vehicles that are considered to be good at retaining their value over time.